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 £78bn at the end of November to £64bn on 31 December 2015. This was driven by a fall in liabilities which was offset slightly by the reduction in asset values.
At 31 December 2015, asset values were £640bn (representing a fall of £6bn compared to the corresponding figure of £646bn as at 30 November 2015), and liability values were £704bn, representing a fall of £20bn compared to the corresponding figure of £724bn at the same date.
Looking at the year on year figures, the overall deficit has fallen from £74bn at 31 December 2014 to £64bn. This improvement was primarily driven by increases in asset values from £624bn to £640bn. Increases in bond yields over the year, which would reduce liabilities, have been offset by increases in market expectations of inflation resulting in a slight rise in liabilities from £698bn to £704bn.
“The year ended of a positive note with deficits reducing over the month of December.” said Ali Tayyebi, Senior Partner in Mercer’s Retirement business. “However deficits have remained at broadly the same level now for the last four calendar year ends going back to the end of 2012, and this highlights that progress towards a genuine and sustained improvement in funding positions has been a challenge for some time.
“The fall in global stock markets, precipitated by the sharp fall in the Chinese stock market on the first trading day in 2016 points to this challenge continuing for some time yet. That being the case, then effective risk management is more likely to be about small well timed steps, rather than waiting for a major improvement in conditions, combined with effective monitoring to spot opportunities for risk reduction and risk transfer.” added Mr Tayyebi.
Le Roy van Zyl, Principal in Mercer’s Financial Strategy Group, said, “With slightly improved funding levels December had better news for pension schemes and sponsors. However, 'one swallow does not make a summer', and looking at the coming year, there is unfortunately considerable scope for downside, with a number of political and economic flashpoints across the globe. Pension schemes still have significant exposures to market conditions and both trustees and sponsors are likely to become increasingly focused on how this financial exposure and other costs can be better managed. In our experience, there are typically 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 emphasis. This means that trustees and sponsors typically have to “up their game” (and make sure their plans are documented).”
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 2014 was £624 billion, compared with estimated aggregate liabilities of £698 billion. Allowing for changes in financial markets through to 31 December 2015, changes to the FTSE350 constituents, and newly released financial disclosures, the estimated aggregate assets were £640 billion, compared with the estimated value of the aggregate liabilities of £704 billion.
About Mercer
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