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FTSE 350 pension scheme deficits increase driven by falling yields and no let-up in inflation

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Mercer’s Pensions Risk Survey data shows that the accounting deficit of defined benefit (DB) pension schemes and other post-retirement benefit plans for the UK’s 350 largest listed companies rose by GBP6 billion over the course of October, standing at GBP94 billion at the end of the month, an increase from GBP88 billion at the end of September. 

The increase was driven by a GBP36 billion increase in liabilities from GBP895 billion at 30 September 2021 to GBP931 billion at the end of October caused by a fall in corporate bond yields. Asset values increased to GBP837 billion compared to GBP807 billion at the end of September. Over the month the deficit varied from GBP93 billion to GBP118 billion.
 
“Our recent survey with the CBI highlighted that employers continue to feel weighed down by the cost of managing DB pension schemes. This month’s data reinforces the challenges still faced by many schemes despite positive momentum on the asset side,” says Tess Page, UK Wealth Trustee Leader at Mercer: “Inflation remains above the Bank of England target, and implied future inflation is also elevated.
 
“In a week when focus is rightly on climate change, this is a timely reminder that interest rates and inflation remain top of the risk list for many pension schemes. Along with planning their climate change risk strategy, Trustees should consider reviewing their approach to hedging assets and liabilities to ensure their strategy remains optimal.”
 
Mercer’s Pensions Risk Survey data relates to about 50 per cent of all UK pension scheme liabilities, with analysis focused on pension deficits calculated using the approach companies have to adopt for their corporate accounts. The data underlying the survey is refreshed as companies report their year-end accounts. Other measures are also relevant for trustees and employers considering their risk exposure. Data published by the Pensions Regulator and elsewhere tells a similar story.

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