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 increased from £119bn on 30 June 2016 to £139bn at the end of July.
At 29 July 2016, asset values were £717bn (representing a rise of £23bn compared to the corresponding figure of £694bn at 30 June 2016), and liability values were £856bn, representing an increase of £43bn compared to the corresponding figure of £813bn at the end of June. Pension liabilities reached a record high at the end of July, the highest level since Mercer has monitored deficits on a monthly basis.
“The continued fall in high quality corporate bond yields meant that liability values increased by over 5% during just one month,” said Ali Tayyebi, Senior Partner in Mercer’s Retirement business. “The combined fall in corporate bond yields since the end of May has meant that deficits have increased by 40% over the two month period up to the end of July, despite an 8% increase in asset values over that period. Deficits have more than doubled since the start of the year.
“The fall in corporate bond yields over the last two months has now broadly matched the fall in gilt yields.This means that both the measure of deficit used for reporting in company accounts, as well as the deficit figure used by pension scheme trustees as a basis for determining cash contribution requirements are now likely to be considerably higher following the Brexit vote,” added Mr. Tayyebi.
Le Roy van Zyl, Senior Consultant in Mercer’s Financial Strategy Group, said: “The vote for Brexit is clearly having a significant impact. Furthermore, the aggregate size of the pension scheme deficits glosses over the fact that some schemes and sponsors will have been much more affected than others, depending on their investment strategy and the nature of the sponsor’s business. In talking to trustees and sponsors over the past month it is clear that the continued uncertainty following the EU referendum makes it a challenging environment to operate a pensions scheme in.
“However, it is recognised that working through scenarios of what might happen is a very useful way of identifying key threats and opportunities. This will enable a revised set of priorities to be adopted, or at least ensure in other cases that “no action” is a deliberate decision. Indeed, some risk management opportunities are now much more attractive than before.”
Mr van Zyl continued “What has become very clear is that because different schemes have different stress points, careful assessment and planning is needed to ensure the right approach is adopted from here on.”
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 July 2016, changes to the FTSE350 constituents, and newly released financial disclosures, the estimated aggregate assets were £717 billion, compared with the estimated value of the aggregate liabilities of £856 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 60,000 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 www.mercer.com. Follow Mercer on Twitter @Mercer. In the UK, Mercer Limited is authorised and regulated by the Financial Conduct Authority.
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