Improvement in financial position still eludes UK pension schemes - deficits reach 12-month high

Mercer’s Pensions Risk Survey data shows that the accounting deficit of defined benefit (DB) pension schemes for the UK’s largest 350 companies increased significantly during April. According to Mercer’s latest data, the estimated aggregate IAS19 deficit  for the DB schemes of FTSE350 companies stood at £111bn (equivalent to a funding ratio of 84%) at 30 April 2014 compared to £102bn (equivalent to a funding ratio of 85%) at 31 March 2014.

At 30 April 2014, asset values stood at £575bn (representing an increase of £4bn compared to the corresponding figure of £571bn as at 31 March 2014), and liability values stood at £686bn (representing an increase of £13bn compared to the corresponding figure at 31 March 2014). As at 31 December 2013, pension scheme deficits stood at £96bn corresponding to a funding ratio of 85%.
 
“It is disappointing that despite more than a 3% increase in the FTSE100 over April, pension scheme deficits still increased so significantly,” said Ali Tayyebi, Senior Partner in Mercer’s Retirement Business. “The driving factor was a significant increase in liability values which in turn resulted from a small reduction in long dated corporate bond yields, combined with a small increase in the market’s expectations for long term inflation. Despite the historically high deficit as at 30 April 2014, the three key drivers of the pension scheme deficit on the balance sheet, namely: corporate bond yields, market implied inflation and the FTSE 100 index, have all individually been at even more unfavorable levels over the last 12 months. 

“This is a sobering thought for those inclined to assume that financial conditions are bound to get better and might therefore be deferring risk management or deficit correction actions on that basis,” added Mr Tayyebi.   

“According to the most recent data available from the Office for National Statistics , UK Companies contributed £63bn to UK pension schemes in 2010, and will likely have seen further increases since 2010. This is up from £25bn in 2000. It is clear that despite this increase in contributions funding levels are not improving. Companies and trustees need to explore other ways of controlling costs, managing risk and discharging liabilities. Companies that execute this efficiently will put themselves at a competitive advantage,” said Adrian Hartshorn, Senior Partner in Mercer’s Financial Strategy Group.
 
Mercer’s data relates only to about 50% 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.

Notes for editors
Mercer estimates the aggregate combined funded ratio of plans operated by FTSE350 companies on a monthly basis. This is based on projections of their reported financial statements adjusted from each company’s financial year end in line with financial indices. This includes UK domestic funded and unfunded plans and all non-domestic plans. The estimated aggregate value of pension plan assets of the FTSE350 companies at 31 December 2012 was £526 billion, compared with estimated aggregate liabilities of £598 billion. Allowing for changes in financial markets through to the end of April 2014, changes to the FTSE350 constituents, and newly released financial disclosures, the estimated aggregate assets were £575 billion, compared with the estimated value of the aggregate liabilities of £686 billion.

For graphs referenced in the release please contact Mercer Press Office m...@mercer.com

 [1] Deficit calculated taking published accounting information under IAS19 and adjusting for market conditions
 [2] Office for National Statistics, Pension Trends, Chapter 8: Pension Contributions, (2012 Edition) published on 17 July 2012