- FTSE350 pension deficit cut by £3 billion in January, equivalent to almost half the decline achieved in the whole of 2017
- Fall driven by 13bp rise in corporate bond yields, reducing liabilities of UK’s largest listed companies
- The reduction in liabilities was offset by a £10 billion fall in asset values
The UK’s FTSE350 pension gap reduced in January, with the deficit of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies reducing by £3 billion to £73 billion. The reduction continues the gains made in 2017, during which the gap fell from £84 billion at the start to £76 billion at the end of the year; a fall of over 9%.
The reduction over January 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 January, liability values had fallen by £13 billion to £844 billion compared to £857 billion at the end of December.
The pension gap narrowed despite the asset valuation falling by £10 billion to £771 billion, with UK equity markets struggling to continue their strong performance in 2017.
Alan Baker, Partner and Chair of Mercer’s DB Policy Group said: “This is a really meaningful reduction in the pension gap in just one month and should be considered as positive news for UK businesses, coming on top of an £8 billion decline last year. However, the fall in asset values was also significant and is an important reminder for individual schemes to consider the level of risk they are running. Trustees and sponsors need to understand their ability to cope with future market volatility, including shocks, and ensure they have clear plans and mitigations in place to protect them from any downside.”
Le Roy van Zyl, Partner and Strategy advisor, added: “While this is welcome news and a positive start to the year for the UK's pension schemes, many still have significant risk exposures and there are a number of scenarios under which this good news could reverse. Trustees and sponsors need to regularly review whether they are holding the right level and type of risks, reflecting on how changes to their circumstances or market conditions could affect them. We expect schemes will continue to take significant steps to reduce risk and believe 2018 will be a big year for pension risk transfer.”
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 the end of 2017 was £781 billion, compared with estimated aggregate liabilities of £857 billion. Allowing for changes in financial markets through to 31 January 2018, changes to the FTSE350 constituents, and newly released financial disclosures, the estimated aggregate assets were £771billion, compared with the estimated value of the aggregate liabilities of £844 billion.
Mercer delivers advice and technology-driven solutions that help organisations meet the health, wealth and career needs of a changing workforce. Mercer’s more than 22,000 employees are based in 44 countries and the firm operates in over 130 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), the leading global professional services firm in the areas of risk, strategy and people. With more than 60,000 colleagues and annual revenue over $13 billion, through its market-leading companies including Marsh, Guy Carpenter and Oliver Wyman, Marsh & McLennan helps clients navigate an increasingly dynamic and complex environment. For more information, visit www.mercer.com. Follow Mercer on Twitter @Mercer. In the UK, Mercer Limited is authorised and regulated by the Financial Conduct Authority.
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