Pensions - Articles - Fall in inflation reduces FTSE 350 pension deficits by £9bn


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 £131bn at the end of June to £122bn on 31 July 2017. At 31 July 2017, liability values fell by £4bn to £865bn compared to £869bn at the end of June. Asset values were £743bn (an increase of £5bn compared to the corresponding figure of £738bn at the end of June 2017).

 The Office for National Statistics (ONS) reported an unexpected fall in UK inflation rate, which in turn reduced market implied inflation over July
 The fall in inflation expectation was offset by a fall in corporate bond yields.

 Ali Tayyebi, a Senior Partner at Mercer, said: “The welcome trend of improvements in the deficit over recent months continues during July. This was largely driven by a small reduction in market expectations for long-term inflation which reduces the pension liability values. An increase in asset values also helped to further improve the funding deficits over July. As past experience has shown, periods of steady improvements can be reversed quickly. The most important question for most pension schemes should therefore be about getting the right balance between protecting improvements in their funding position and relying on continued out-performance from risk based or unmatched asset strategies.”

 Le Roy van Zyl, a strategic advisor and Partner at Mercer, added: “There have now been a few months of good news. We are seeing trustees and sponsors with robust governance mechanisms in place taking advantage of these opportunities. Indeed, with the more favourable circumstances, some have been pleasantly surprised by how much their long term strategic plan has progressed. The intention is of course to strengthen pension scheme finances against the possibility of conditions deteriorating again. Under an effective Integrated Risk Management framework there is now much more freedom to consider a wide range of actions, and many trustees and sponsors are therefore already seeing the benefit come through from their effort in setting up such a framework.”

 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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