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 decreased from £57bn at the end of May to £48bn by the end of June.
Liability values increased by £4bn to £860bn due to a 0.07% decline in corporate bond yields, but this was mitigated by a 0.05% fall in market implied inflation. Asset values stood at £812 billion, a £13 billion increase from the end of May.
Maria Johannessen, Partner at Mercer, said: “This month’s improvement in funded status is a positive turn after a period of three months where changes to the FTSE 350 pension deficit have been negligible. Despite a £4 billion uptick in liabilities, the £13 billion increase in asset values led to the deficit falling by £9 billion in June, the most significant monthly improvement in funding levels since November 2018. The fall in market implied inflation to 3.39% was enough to offset the drop in corporate bond yields which decreased by 0.7% to 2.25%.”
Charles Cowling, Actuary at Mercer, added: “In spite of the welcome decline in the deficit this month, significant macroeconomic and political headwinds remain. The UK awaits a new Prime Minister following Theresa May’s resignation last month and Britain’s negotiating position on Brexit is far from clear, A combination of global trade tensions and an increased perceived likelihood of a no-deal Brexit, means we expect market volatility to be a consistent feature of the months ahead. Lower energy prices and weakening UK growth are reflected in CPI inflation falling back recently. However, a Brexit sterling crisis and resulting inflation shock is still a real possibility. In this uncertain environment trustees should continue to prioritise risk management and actively seek to take advantage of market opportunities to de-risk.”
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 2018 was £747 billion, compared with estimated aggregate liabilities of £788 billion. Allowing for changes in financial markets through to 30 June 2019, changes to the FTSE350 constituents, and newly released financial disclosures, the estimated aggregate assets were £812 billion, compared with the estimated value of the aggregate liabilities of £860 billion.
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