Increases in liabilities swamp market rises


Increases in FTSE350 pension scheme liabilities swamp market rises

  • 3 December 2015
  • United Kingdom, London
  • Accounting deficits increase by £16bn for the FTSE350 (the biggest monthly increase since the start of the year) despite asset market rises
  • Falling bond yields increase liabilities and continue to highlight the volatility for sponsors and trustees

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 £63bn at the end of October to £79bn on 30 November 2015. This was driven by an increase in liabilities which was offset slightly by the increase in asset values.

At 30 November 2015, asset values were £645bn (representing a rise of £6bn compared to the corresponding figure of £639bn as at 31 October 2015), and liability values were £724bn, representing a rise of £22bn compared to the corresponding figure of £702bn at the same date.

“The measure of deficits which is reported on company balance sheets had largely defied stock market falls over the last few months. This is because these deficits are measured by reference to prevailing yields on high quality corporate bonds which had increased since late Spring.” said Ali Tayyebi, Senior Partner in Mercer’s Retirement business. “However we have seen a modest reversal of that rise in corporate bond yields during November and this was sufficient to mean that deficits increased despite an increase in asset values,” continued Mr. Tayyebi, “this has served to highlight the ongoing volatility that sponsors and trustees face.”

Le Roy van Zyl, Principal in Mercer’s Financial Strategy Group, said, “November was painful for pension schemes and sponsors, with deficits increasing by roughly 25% over the month. Unfortunately, there is still considerable scope for further downside, with a number of political and economic flashpoints across the globe. Some trustees and sponsors are likely to become increasingly worried about their pension schemes’ financial exposure and cost, and it is therefore very important that a wider set of mitigations and solutions are considered to avoid any ill-advised instinctive reaction. Just “throwing more cash at the problem” is frequently a sub-optimal solution. Approaches such as increased contingent security, de-risking and funding should be seriously considered, amongst others.”

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 30 November 2015, changes to the FTSE350 constituents, and newly released financial disclosures, the estimated aggregate assets were £645 billion, compared with the estimated value of the aggregate liabilities of £724 billion.

About Mercer
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