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 by £10bn in just five days, from £139bn at the end of July to £149bn on 4 August, following the MPC vote to cut the Bank Rate from 0.5% to 0.25%.
On 4 August 2016, asset values were £721bn (representing a rise of £4bn compared to the corresponding figure of £717bn at 29 July 2016), and liability values were £870bn, representing an increase of £14bn compared to the corresponding figure of £856bn at the end of July. Both pension liabilities and deficits reached a record high at 4 August 2016, the highest level since Mercer started monitoring deficits on a monthly basis.
“This sudden increase reminds us that it is the outlook for future long-term secure investment returns which drives pension scheme deficits - much more than the short term performance of assets,” said Ali Tayyebi, Senior Partner in Mercer’s Retirement business. “Asset values are around 12% higher than they were a year ago but the ratio of assets to liabilities has reduced from 89% to 83% and the deficits have increased from £81bn to £149bn over the same period.”
Le Roy van Zyl, Senior Consultant in Mercer’s Financial Strategy Group, said: “The aftermath of the vote for Brexit is still having a significant impact. The Bank of England’s actions should help to support economic activity, but whether the economy is going into recession is still unclear. This will of course have an effect on pension scheme finances and the health of sponsors – in some cases significantly so, depending on schemes’ investment strategy and the nature of the sponsor’s business.”
Mr van Zyl added: “As these uncertainties may well not clear up for some time, and there is likely to be significant volatility still to come, it is not appropriate to follow a wait-and-see approach for the majority of schemes. Opening a dialogue between trustees and sponsors around how to tackle potential developments is a key step that can be taken in the face of these uncertainties.”
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 2015 was £640 billion, compared with estimated aggregate liabilities of £704 billion. Allowing for changes in financial markets through to 4 August 2016, changes to the FTSE350 constituents, and newly released financial disclosures, the estimated aggregate assets were £721 billion, compared with the estimated value of the aggregate liabilities of £870 billion.
About Mercer
Mercer is a global consulting leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and performance 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 human capital. With 60,000 employees worldwide and annual revenue exceeding $13 billion, 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. In the UK, Mercer Limited is authorised and regulated by the Financial Conduct Authority.
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