Pension Risk Survey February 2017


Inflation uncertainties stall FTSE350 pension deficit recovery

  • 2 February 2017
  • United Kingdom, London
  • Assets and liabilities fall but pension deficits rise at the end of January
  • An increase in the market’s inflation expectations restricted any fall in liabilities
  • Managing pension risks will continue to be vital in 2017 as UK starts the Brexit process

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 £137bn at the end of December to £140bn on 31 January 2017.

At 31 January 2017, asset values were £714bn (representing a decrease of £6bn compared to the corresponding figure of £720bn at 30 December 2016), and liability values were £854bn (representing a fall of £3bn compared to the corresponding figure of £857bn at the end of December).

“Despite an improvement in corporate bond yields and a related decrease in liabilities we saw slight deterioration in funded status over January, with the deficit increased by £3bn over the month to £140bn,” said Alan Baker, UK DB Risk Leader for Mercer. “The positive effects of a reduction in liabilities of £3bn were offset by a drop in asset values of £6bn. There are real concerns as we move forward into 2017 particularly around inflation and trustees and sponsors should take every opportunity to understand their risk exposure and seek to manage it in line with their objectives and in line with the level of risk that the sponsor can support. The regulator’s Integrated Risk Management framework is crucial to developing the right plans and framework to deal with choppy waters ahead. No plan is not a good strategy.”

Adrian Hartshorn, a Mercer Senior Partner, commented, “Despite the relative stability in the funding level over the last 3 months, political uncertainty is driving increased uncertainty in financial markets. Trustees and Sponsors will need to think carefully about the impact on funding level, cash contributions and pension accounting numbers, and how some scenarios might lead to downside outcomes. Effective mitigations can then be considered through one of a variety of strategic solutions, either on the asset side or liability side of the balance sheet.” 

Mr Hartshorn added that, “Clearly such actions are often best combined with measures to strengthen covenant protection by providing alternative security to the scheme rather than direct cash funding.

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 2016 was £857 billion, compared with estimated aggregate liabilities of £720 billion. Allowing for changes in financial markets through to 31 January 2016, changes to the FTSE350 constituents, and newly released financial disclosures, the estimated aggregate assets were £714 billion, compared with the estimated value of the aggregate liabilities of £854 billion.

About Mercer
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