- Deficits increased from £39bn at the end of 2015 to £137bn on 30 December 2016.
- Corporate bond yields fell by more than 100 basis points over 2016, increasing liabilities on companies’ balance sheets.
- Pension deficit contributions and positive asset returns have been offset by the fall in corporate bond yields and rise in inflation expectations.
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 £127bn at the end of November to £137bn on 30 December 2016.
At 30 December 2016, asset values were £720bn (representing an increase of £19bn compared to the corresponding figure of £701bn at 30 November 2016), and liability values were £857bn (representing an increase of £29bn compared to the corresponding figure of £828bn at the end of November). Both liabilities and deficits have increased significantly compared to the end of 2015 when assets were £634bn and liabilities were £673bn with a corresponding deficit of £39bn.
“After a very challenging year, pension deficits increased again and end the year more than three times higher than the end of 2015 at £137bn. This continues to put real pressure on any risk management plans and will require Trustees and corporate sponsors to work closely together to establish the right framework to monitor and manage those risks,” said Alan Baker, UK DB Risk Leader for Mercer. “Depending on the nature and sensitivity of the pension scheme's covenant it is crucial that Trustees and sponsors position themselves appropriately to deal with the key scenarios that can emerge."
Le Roy van Zyl, a Mercer Senior Consultant, commented, "Pension scheme trustees and sponsors face the new year with significant uncertainty. Brexit is likely to move beyond a mere intention, and the effect of new leadership in the US will become clear - not to mention other major events such the French presidential elections.”
Mr van Zyl added, "If we look at how volatile conditions have been, and how volatile they may well continue to be, schemes will have to be responsive on a variety of issues. In this environment, best outcomes will be achieved by tackling covenant, funding and risk management together. It will be especially important to focus on future cashflow requirements in different scenarios."
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 £634 billion, compared with estimated aggregate liabilities of £673 billion. Allowing for changes in financial markets through to 30 December 2016, changes to the FTSE350 constituents, and newly released financial disclosures, the estimated aggregate assets were £720 billion, compared with the estimated value of the aggregate liabilities of £857 billion.
Mercer is a global consulting leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and careers 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 people. With annual revenue of $13 billion and 60,000 colleagues worldwide, 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.
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