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Pension deficits remain high as inflation wipes out other gains, says Mercer

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The accounting deficit of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies reduced slightly from GBP160 billion at the end of August to GBP152 billion on 30 September 2016, according to Mercer’s Pensions Risk Survey.

Corporate bond yields increased over the month, however the benefit of that was largely offset by a rise in market implied inflation.
 
At 30 September 2016, asset values were GBP720 billion (representing a fall of GBP5 billion compared to the corresponding figure of GBP725 billion as at 31 August 2016), and liability values were GBP872 billion, representing a fall of GBP13 billion compared to the corresponding figure of GBP885 billion at 31 August.
 
“The net change in deficits from the start to the end of September has been relatively small compared to recent months but it does buck the trend of the straight increase in deficits month on month since February. Even so, deficits have increased by over GBP100 billion since the start of the year,” says Ali Tayyebi (pictured), senior partner in Mercer’s retirement business. “As we approach the accounting year end for many companies we are getting nearer to the time that these deficits will now be crystallised on the balance sheet.”       
                      
Le Roy van Zyl, senior consultant in Mercer’s financial strategy group, says: “September was another very volatile month in pension scheme financing. This volatility again underscores that schemes positioned for taking advantage of (frequently short lived) improvements in equity markets, interest and inflation rate market experience will have had valuable de-risking opportunities in recent months. Schemes who were able to transact are those that had pragmatic monitoring and execution frameworks in place.
 
“When deciding the best route forward, trustees and sponsors must clearly consider taking material steps to achieve cost-effective risk management; many clients have benefitted from a series of small but incremental changes over the course of the year. It is also interesting to note that despite these market conditions we are seeing continuing activity in the risk transfer market – the number of clients signing up to our online Pension Risk Exchange continues to grow and we are expecting a busy fourth quarter for the bulk annuity market,” adds van Zyl.
 
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. 

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