Despite market volatility over February FTSE350 pension deficits

Despite market volatility over February FTSE350 pension deficits continue to narrow

Despite market volatility over February FTSE350 pension deficits continue to narrow

  • 2 MARCH 2018
  • United Kingdom, London
  • FTSE350 accounting pension deficits reduce slightly by £1 billion in February
  • Fall driven by resilience of corporate bond yields, reducing pension liabilities by £7 billion of UK’s largest listed companies
  • Reduction in liabilities offset by £6 billion decline in pension scheme assets

The UK’s FTSE350 pension gap reduced by a further £1 billion in February to £72 billion. Combined with January’s fall of £3 billion, 2018 has already matched half the decline achieved in 2017. 

The reduction of defined benefit (DB) pension schemes deficits for the UK’s 350 largest listed companies was driven by rising corporate bond yields reducing pension schemes’ liabilities, although this was partially offset by an increase in market implied inflation. At the end of February, liability values had fallen by £7 billion to £837 billion, while asset values were down by £6 billion to £765 billion.  

Alan Baker, Partner and Chair of Mercer’s DB Policy Group, said: “2018 has started where 2017 left off, with a reduction in the pension gap and good news for UK businesses. Underlying the good headline news, February actually saw significant fluctuations, and this demonstrates the importance of trustees and sponsors understanding the overall level of risk facing their pension scheme. Trustees and sponsors should put in place the necessary steps to mitigate against future volatility and ensure any potential downside is in line with their risk appetite. They should also make sure the right governance is in place to allow them to respond and react in time.” 

Le Roy van Zyl, Partner and Strategy advisor, added: “While this is more welcome news for UK pension schemes, many are alive to the risks they face through continued economic uncertainty. More recently, schemes have been seeking certain strategies that allow them to retain some upside potential, such as with equity prices, whilst protecting themselves from the most adverse outcomes. While this approach foregoes some of the gains they might otherwise achieve, it ensures they are well placed to weather a hard storm.” 

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 to 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 2017 was £781 billion, compared with estimated aggregate liabilities of £857 billion. Allowing for changes in financial markets through to 28 February 2018, changes to the FTSE350 constituents, and newly released financial disclosures, the estimated aggregate assets were £837 billion, compared with the estimated value of the aggregate liabilities of £765 billion. 

About Mercer

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