FTSE 350 Companies’ Pension Liabilities at 2012 High Point

The accounting deficit of defined benefit (DB) pension schemes in the UK increased during November, according to data compiled by Mercer.

The consulting firm reports that the estimated aggregate International Accounting Standards (IAS) 19 deficit for the defined benefit schemes of the FTSE350 companies stood at £61bn – equivalent to a funding ratio of 90% – at 30 November 2012. The figure compares with a deficit figure of £55bn at the end of September 2012 (funding ratio of 90%) and a figure of £61bn at the end of December 2011 (funding ratio of 89%), using a like for like measure. 

During November, the main changes were a reduction in corporate bond yields and an increase in the market’s expectations for long-term inflation (measured using the difference between fixed and index linked gilt yields).  Both factors individually serve to increase the calculation of the liabilities and together increased the liabilities by nearly 2%, or £10bn, over the month from £575bn to £585bn. Asset values also increased from £520bn at 31 October 2012 to £524bn at 30 November 2012, to partially offset the increase in the liabilities.

“As we approach 31 December, which is the effective reporting date for the majority of FTSE350 companies, the unwelcome trend in increased liability values and lack of confidence in investment markets continues,” said Ali Tayyebi, Mercer’s head of DB Risk in the UK.

“The primary driver of the calculation of liabilities is the real yield on corporate bonds (which is the nominal yield in excess of market implied inflation). This fell to its low point for the year correspondingly increasing the liability calculation to its high point for the year. These same market conditions will also increase the accounting pension expense for many companies leading to lower profitability in 2013, all other things being equal.”

Adrian Hartshorn, a partner in Mercer’s financial strategy group, added: “As market conditions have changed through 2012 there have been a range of different opportunities for schemes to evolve their investment strategy, both to reduce risk and capture return opportunities. To capture these opportunities requires a streamlined governance approach and regular monitoring of both the scheme’s financial position and the market opportunities.

“Governance structures continue to evolve with some trustee bodies retaining day to day decision making within the trustee body working closely with their advisers and other adopting a delegated approach where day to day decisions are delegated to a third party.”

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