The FINANCIAL — 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 £49bn at the end of February to £81bn on 31 March 2016.
At 31 March 2016, asset values were £657bn (representing an increase of £10bn compared to the corresponding figure of £647bn at 29 February 2016), and liability values were £738bn, representing an increase of £42bn compared to the corresponding figure of £696bn at the end of February.
“The fall in corporate bond yields combined with an increase in the market’s view of long term inflation meant that liability values increased by over 5% during just one month, corresponding to a 65% increase in deficit values,” said Ali Tayyebi, Senior Partner in Mercer’s Retirement business. “Although the fall in corporate bond yields was significant, the difference between corporate bond yields and government bond yields remains somewhat higher than a year ago. All else being equal, any further narrowing of that gap exposes companies to a further increase in the pensions liabilities on their balance sheets.”
Le Roy van Zyl, Principal in Mercer’s Financial Strategy Group, said, “March has been another very volatile month in the financial position of pension schemes, with no reason to believe that things will quieten down in the months to come. It is easy to forget that volatility also creates opportunities, but that these will be wasted if pension scheme trustees and sponsors are not ready to quickly take advantage of them. This could range from locking in some of the good news that may come from equity markets and/or interest rates, to proceeding with previously delayed risk transfer to insurers.”
Mr. van Zyl continued, “Given this level of volatility, it is not surprising that we have already seen 50 clients (primarily across the US and UK), representing £6bn of assets, sign up to Mercer Pension Risk Exchange to better understand how the real cost of a bulk annuity transaction is changing month to month and to highlight genuine opportunities to transact.”
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.
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