Pension scheme accounting deficits for UK companies in the FTSE350 had risen to £108bn at the end of last month, corresponding to a funding ratio of assets over liabilities of 84% according to Mercer.
The consulting firm reported that although equity markets recovered quickly from falls earlier in April, the fall in high quality corporate bond yields increased liability values to levels not seen since March 2007. Over the month pension deficits increased by £19bn, from a deficit of £89bn at 31 March 2013. As at 31 December 2012 pension deficits stood at £72bn (corresponding to a funding level of 88%).
Pensions Risk Survey
data also showed asset values increased from £552bn at 31 March to £557bn at 30 April. Although the market’s view of long term inflation reduced marginally, which by itself reduces the value placed on scheme liabilities, there was a significant fall in high quality corporate bond yields with the net effect that total liabilities increased in value from £641bn at 31 March 2013 to £665bn at 30 April 2013.
“The equity markets recovered well from their dip early in the month and asset values increased by around £5bn over April,” said Ali Tayyebi, Mercer’s head of defined benefit (DB) risk in the UK. “It will therefore be a surprise and disappointment to many that both liability values and deficits still managed to reach highs not seen for several years.
“The key driver was the fall in high quality corporate bond yields, which have closely tracked the sharp falls in real gilt yields in late March / early April, so that the difference between the yield on these corporate bonds and market implied price inflation is now only just over 1% pa. The environment is proving particularly frustrating for many schemes who will have experienced significant improvements in their asset values but who feel that de-risking into gilts does not look particularly attractive at current prices,”.
Adrian Hartshorn, senior partner in Mercer’s financial strategy group, added: “With the continued low yield on UK government bonds both corporate sponsors of defined benefit schemes and trustees need to consider a wider range of assets to generate return. It is important to consider the income, risk and return characteristics of the alternative range of assets to ensure the portfolio is structured to meet the investment objectives for the scheme.
“At the same time sponsors and trustees should consider alternative cost effective ways to manage risk. This might include, for example longevity swaps, liability management exercises or the use of contingent asset structures to support scheme funding.”
Mercer’s data relates only 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 UK’s pensions regulator and elsewhere tells a similar story.
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