Survey: Rising Inflation Expectations to Continue High UK Pension Deficits

Mercer’s Pensions Risk Survey data shows that the accounting deficit of defined benefit pension schemes for UK companies remained unchanged over the month of November. According to Mercer’s latest data, the estimated aggregate IAS19 deficit for the defined benefit schemes of FTSE350 companies stood at £102bn (equivalent to a funding ratio of 85%) at 30 November 2013.

Asset values fell by £3bn over the month from £566bn at 31 October 2013 to £563bn at 30 November 2013.  Liability values also fell by £3bn over the month from £668bn at 31 October 2013 to £665bn at 30 November 2013.

“The fall in corporate bond yields which was largely responsible for the increase in deficits during October was reversed during November,” says Ali Tayyebi, head of DB Risk in the UK. “However this did not lead to a material fall in the value of liabilities because the market’s expectation for long-term inflation increased. This was despite the November Inflation report from the Bank of England saying that the outlook for near-term inflation was less than 3 months ago. This means that yet again circumstances have conspired to keep accounting deficits stubbornly high as companies approach 31 December year-ends.”

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.

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