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Pension deficits reach record level of GBP189bn

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The accounting deficit of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies increased from GBP139 billion at the end of July to GBP189 billion on 31 August 2016, according to Mercer’s latest Pensions Risk Survey.

At 31 August 2016, asset values were GBP737 billion, representing a rise of GBP20 billion compared to the corresponding figure of GBP717 billion at 29 July 2016.
 
Liability values were GBP926 billion, representing an increase of GBP70 billion compared to the corresponding figure of GBP856 billion at the end of July.
 
Both pension liabilities and deficits reached a record high at the end of August, the highest level since Mercer has monitored deficits on a monthly basis.
 
“Despite an increase in asset values over the month, August saw the biggest monthly rise in deficits since records began,” says Ali Tayyebi, senior partner in Mercer’s retirement business. “This was largely driven by a further sharp fall in long dated corporate bond yields. This also means that our reference long-dated corporate bond yield has now fallen below 2 per cent p.a. for the first time representing yet another milestone into uncharted territory.”
 
Le Roy van Zyl (pictured), senior consultant in Mercer’s financial strategy group, says: “The seemingly relentless march in pension scheme deficit increases continues. Depending on the specific situation of the pension scheme and its sponsor, these numbers will have to be dealt with. The first key question to address is how much deficit contributions should the sponsor be paying, recognising the security needs of the pension scheme as well as the appropriate alternative uses for this cash. Another key question is how much risk should currently be run; on the one hand, can the scheme and sponsor afford conditions to deteriorate further, but on the other; what is the opportunity cost if risk is reduced now and markets improve from here on out?
 
“There are few easy answers here, apart from the obvious one that any action, including ‘no action’, should be carefully considered amongst the key stakeholders. Letting things drift can be just as dangerous as taking knee-jerk actions.”
 
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. 

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