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Still no improvement in pensions deficits despite assets reaching new peak

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Pension scheme accounting deficits for FTSE350 companies were £85bn at 31 July 2013, corresponding to a funding ratio of assets over liabilities of 87 percent.

Deficits remained higher than at the start of the year. Falls in bond yields have increased pension scheme liabilities and more than offset the increase in pension scheme asset values. Over the month pension deficits increased by £3bn. As at 31 December 2012 pension deficits stood at £72bn (corresponding to funding level of 88 percent). Mercer’s Pensions Risk Survey data shows that the accounting deficit of defined benefit pension schemes for UK companies increased over the month of July. According to Mercer’s latest data, the estimated aggregate IAS19 deficit[1] for the defined benefit schemes of FTSE350 companies stood at £85bn (equivalent to a funding ratio of 87 percent) at 31 July 2013. This compares to a deficit figure of £82bn at the end of June 2013 (funding ratio of 87 percent). Asset values increased by £15bn over the month, from £542bn at 30 June 2013 to £557bn at 31 July 2013. However, liability values also increased by £18bn over the month from £624bn at 30 June 2013 to £642bn at 31 July 2013.

“Despite a strong rebound in equity values over July, pension scheme deficits still showed a slight increase over the month. The FTSE100 index increased by 6.6 percent over the month taking pension scheme asset values back up to their highest month-end levels for the year. However this was more than offset by a fall in high quality corporate bond yields which increased liability values by a greater amount.” said Ali Tayyebi, head of DB Risk in the UK. “The fall in high quality corporate bond yields is in contrast to yields on Government bonds which remained virtually unchanged over the month. This reduces the “spread” or difference between yields on long dated high quality corporate bonds and government bonds to levels last seen in the first half of 2011. This may be good news for corporates wanting to raise debt finance but has been a barrier to reducing pension scheme deficits despite a strong recovery in equity markets,” added Mr Tayyebi.

“Notwithstanding the stable overall funding position, there have been a number of interesting developments over the last month. For example, Citi's Pension Solutions team, as advised by Mercer, completed the largest pension buyout to date – the £1.5bn buyout of the EMI Group Pension Fund with Pension Insurance Corporation. In addition, we are seeing US equity markets hitting record highs and credit spreads returning towards pre-crisis levels. This is causing some trustees and corporate sponsors to consider whether now is the time to bank gains from recent strong performance in these areas and accelerate risk management strategies,” commented Andrew Ward of Mercer’s Financial Strategy Group. Mr Ward added “Liability hedging opportunities are also continuing to develop. For example, the recent ultra long-dated fixed interest gilt issuance appears likely to be followed by a similarly long-dated index linked gilt issuance later in the quarter. If they are not already doing so, trustees and sponsors should consider the appropriateness of their current approach in the context of these developments.”

Mercer’s data relates only to about 50 percent 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.

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