The UK’s FTSE350 pension gap reduced in January, with the deficit of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies reducing by GBP3 billion to GBP73 billion.
The reduction continues the gains made in 2017, during which the gap fell from GBP84 billion at the start to GBP76 billion at the end of the year; a fall of over 9 per cent.
The reduction over January was driven by rising corporate bond yields reducing pension schemes’ liabilities, although this was partially offset by an increase in market implied inflation. At the end of January, liability values had fallen by GBP13 billion to GBP844 billion compared to GBP857 billion at the end of December.
The pension gap narrowed despite the asset valuation falling by GBP10 billion to GBP771 billion, with UK equity markets struggling to continue their strong performance in 2017.
Alan Baker (pictured), Partner and Chair of Mercer’s DB Policy Group, says: “This is a really meaningful reduction in the pension gap in just one month and should be considered as positive news for UK businesses, coming on top of an GBP8 billion decline last year. However, the fall in asset values was also significant and is an important reminder for individual schemes to consider the level of risk they are running. Trustees and sponsors need to understand their ability to cope with future market volatility, including shocks, and ensure they have clear plans and mitigations in place to protect them from any downside.”
Le Roy van Zyl, Partner and Strategy advisor, adds: “While this is welcome news and a positive start to the year for the UK’s pension schemes, many still have significant risk exposures and there are a number of scenarios under which this good news could reverse. Trustees and sponsors need to regularly review whether they are holding the right level and type of risks, reflecting on how changes to their circumstances or market conditions could affect them. We expect schemes will continue to take significant steps to reduce risk and believe 2018 will be a big year for pension risk transfer.”
Mercer’s data relates to about 50 per cent of all UK pension scheme liabilities and analyses 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. But data published by the Pensions Regulator and elsewhere tells a similar story.