The FINANCIAL — Mercer has on April 4 published its Pensions Risk Survey for the first three months of 2018, which shows a significant fall in the deficit of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies.
The deficit has already fallen by £4 billion to £72 billion so far this year, continuing the reductions achieved in 2017, in which the gap fell by £8 billion; a fall of over 9%.
The fall in accounting deficits of the UK’s 350 largest listed companies has been achieved through a reduction of pension schemes’ liabilities, as a result of rising corporate bond yields, which has outweighed a notable fall in asset valuations. Liabilities have reduced by £19 billion to £838 billion, while asset valuations have fallen by £15 billion to £766 billion in the first quarter of 2018, according to Mercer.
Alan Baker, Partner and Chair of Mercer’s DB Policy Group, said: “2018 has already delivered a meaningful reduction in the pensions gap, which frees up money to either be invested in growth or returned directly to investors. However, the continuing decline of asset valuations serves as an important reminder of the very real risks facing pension schemes. Trustees and sponsors must actively monitor and mitigate the risks they’re running, to ensure their exposure is in line with their risk appetite.”
Le Roy van Zyl, Partner and Strategy advisor, added: “The quarter saw very significant asset and liability swings, with recent declining asset valuations creating cause for concern. In response, we continue to see schemes opting for strategies that protect themselves from the most adverse outcomes, whilst retaining some upside potential. Experience is also emphasising the need to be able to react quickly to opportunities that may well be short lived.”
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.