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Mercer’s Pensions Risk Survey data shows the estimated aggregate IAS19 deficit for the defined benefit schemes of the FTSE350 companies stood at £75bn (equivalent to a funding ratio of 87%) at 31 July 2012. This compares to a deficit figure of £70bn at the end of June (funding ratio of 88%) and a figure of £61bn at the end of December 2011 (funding ratio of 89%). The data also reveals long-term market implied Retail Price Index (RPI) inflation fell significantly by around 25 bps, which by itself served to reduce the value placed on scheme liabilities. However high quality corporate bond yields also reduced by around the same amount. A fall in corporate bond yields, which are used to place a value on pension scheme liabilities in company accounts, will increase the value placed on these liabilities, and this more than offset the effect of the fall in market implied inflation. This meant the overall liability value increased by slightly more than 2% over the month to £585bn as at 31 July 2012. Asset values also increased marginally from £501bn as at 30 June 2012 to £510bn as at 31 July 2012, so that the net increase in the deficit was only £5bn. The increase in liability values also comes despite plan sponsors contributing an estimated £1bn-£2bn per month towards pension scheme deficits. Adrian Hartshorn, a Partner in Mercer’s Financial Strategy Group, said: “Relatively small changes in investment markets have a very material impact on the financial position of UK pension schemes, more so than the deficit contributions that are being made by companies. This highlights the importance of ensuring the investment strategy (and the risk associated with that investment strategy) is affordable and can be supported by the sponsor’s covenant. “As the difficult pension scheme funding environment continues, new and innovative tools are being brought to the market to support companies and trustees in their funding discussions. It is important for both companies and trustees to assess the range of options available as they move forward in managing the pension scheme’s finances.”
Mercer’s Pensions Risk Survey data shows the estimated aggregate IAS19 deficit for the defined benefit schemes of the FTSE350 companies stood at £75bn (equivalent to a funding ratio of 87%) at 31 July 2012. This compares to a deficit figure of £70bn at the end of June (funding ratio of 88%) and a figure of £61bn at the end of December 2011 (funding ratio of 89%).
The data also reveals long-term market implied Retail Price Index (RPI) inflation fell significantly by around 25 bps, which by itself served to reduce the value placed on scheme liabilities. However high quality corporate bond yields also reduced by around the same amount. A fall in corporate bond yields, which are used to place a value on pension scheme liabilities in company accounts, will increase the value placed on these liabilities, and this more than offset the effect of the fall in market implied inflation. This meant the overall liability value increased by slightly more than 2% over the month to £585bn as at 31 July 2012. Asset values also increased marginally from £501bn as at 30 June 2012 to £510bn as at 31 July 2012, so that the net increase in the deficit was only £5bn.
The increase in liability values also comes despite plan sponsors contributing an estimated £1bn-£2bn per month towards pension scheme deficits.
Adrian Hartshorn, a Partner in Mercer’s Financial Strategy Group, said: “Relatively small changes in investment markets have a very material impact on the financial position of UK pension schemes, more so than the deficit contributions that are being made by companies. This highlights the importance of ensuring the investment strategy (and the risk associated with that investment strategy) is affordable and can be supported by the sponsor’s covenant. “As the difficult pension scheme funding environment continues, new and innovative tools are being brought to the market to support companies and trustees in their funding discussions. It is important for both companies and trustees to assess the range of options available as they move forward in managing the pension scheme’s finances.”
PLANSPONSOREurope Staff editors@plansponsoreurope.com