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 fell from £152bn at the end of September to £149bn on 31 October 2016.
At 31 October 2016, asset values were £711bn (representing a fall of £9bn compared to the corresponding figure of £720bn at 30 September 2016), and liability values were £860bn, representing a fall of £12bn compared to the corresponding figure of £872bn at the end of September, according to Mercer.
“It is perhaps not a surprise that the fall in the value of sterling has now lead to an increase in the expectations for long-term inflation with the market implied inflation from gilt yields now at its highest level since 2011.” said Ali Tayyebi, Senior Partner in Mercer’s Retirement business. “This has been accompanied by an arguably related rise in fixed interest gilt and bond yields with a corresponding reduction in the value of those assets. The net effect is an improvement in total deficits over the month but the position is likely to vary from scheme to scheme.”
Le Roy van Zyl, Senior Consultant in Mercer’s Financial Strategy Group, said, “Rising inflation expectations have put a dampener on what would otherwise have been a good month for pension scheme funding levels. Despite promising signs for developed market economies, the uncertainty around Brexit for UK inflation, interest rates and growth orientated assets means that trustees and sponsors must continue their vigilance. This will particularly be the case if there is a sense that the outlook for the sponsor’s business has been adversely affected.”
Mr van Zyl continued: “Given that clarity around Brexit will not emerge for some time to come, it is important that trustees and sponsors now work through the various potential scenarios and arrive at appropriate outcomes for all. In this way there is still time to take steps to contain risk at an acceptable cost.”
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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