FTSE350 pension deficits improve by £17 billion despite February’s market turmoil

  • 2 March 2016
  • United Kingdom, London
  • Accounting deficits fell by £17bn to £49bn at the end of February 2016
  • In contrast, liabilities on a funding basis have increased by £13bn over the same period.

Mercer’s Pensions Risk Survey data shows that the accounting deficit of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies fell from £66bn at the end of January to £49bn on 29 February 2016.

At 29 February 2016, asset values were £647bn (representing an increase of £3bn compared to the corresponding figure of £644bn at 31 January 2016), and liability values were £696bn, representing a reduction of £14bn compared to the corresponding figure of £710bn at the same date.   Over the same period technical provisions liabilities which drive trustees’ decision making and likely demands for funding from employers, rose by £13bn.

“With everyone’s primary focus on the stock market and government bond yields it will be a surprise that the accounting deficits have improved quite so much over the month.”  said Ali Tayyebi, Senior Partner in Mercer’s Retirement business. “This is because the yield on corporate bonds - relative to gilts - have increased over the month and this has reduced the calculation of the liability measure reported on companies’ balance sheets”.

He continued, “In contrast the calculation of liabilities typically used by pension fund trustees for determining cash contribution requirements is based on gilt yields.  As these yields fell during the month, funding deficits for many schemes will have increased at the same time as accounting deficits will have reduced. This will be unwelcome news as some of these schemes approach their regular funding valuation dates at 31 March or 5 April.”   

Le Roy van Zyl, Principal in Mercer’s Financial Strategy Group, said, “February was a very volatile month, reflecting an amalgam of economic and political narratives that could have further serious repercussions. Even though the month ended off its lows, there should be no doubt that the potential for significant setbacks to pension schemes in the months and years to come, with consequences for cash funding, is very real. Against this backdrop, both trustees and sponsors are likely to become increasingly focused on how their financial exposure and other costs can be better managed.

“In our experience, there are significant steps that can be taken to improve risk mitigation and therefore control cost over the short and long term. This is reinforced by the Pensions Regulator’s recent Integrated Risk Management guidance which emphasises the need for looking at solutions that incorporate all key areas of potential risk. This means that trustees and sponsors typically have to “up their game” (make sure their plans are documented and take account of funding investment and covenant risks).”

Mercer’s data relates 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 2015 was £640 billion, compared with estimated aggregate liabilities of £704 billion. Allowing for changes in financial markets through to 29 February 2016, changes to the FTSE350 constituents, and newly released financial disclosures, the estimated aggregate assets were £647 billion, compared with the estimated value of the aggregate liabilities of £696 billion.

About Mercer
Mercer is a global consulting leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and performance of their most vital asset – their people. Mercer’s more than 20,000 employees are based in 43 countries and the firm operates in over 140 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global professional services firm offering clients advice and solutions in the areas of risk, strategy and human capital. With 57,000 employees worldwide and annual revenue exceeding $13 billion, Marsh & McLennan Companies is also the parent company of Marsh, a leader in insurance broking and risk management; Guy Carpenter, a leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a leader in management consulting. For more information, visit Follow Mercer on Twitter @Mercer. In the UK, Mercer Limited is authorised and regulated by the Financial Conduct Authority.

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