Pensions - Articles - Pension deficits for FTSE350 firms remain relatively stable

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 reduced slightly from £67bn at the end of October to £64bn on 30 November 2017. At the end of November, liability values had fallen by £3bn to £829bn compared to £832bn at the end of October. Asset values remained unchanged at £765bn.

 Alan Baker, Partner at Mercer, said: “Although asset values have stayed broadly unchanged in November, we’ve seen a slight improvement in funding levels with the deficit falling from £67bn to £64bn. This is the lowest end of month position since March 2016. The funding level remained the same at 92%. Although there has continued to be some underlying volatility, this means that funding positions have improved and remained broadly stable over the last few months. Experience suggests it would be unwise to rely on this and the critical question for all sponsors and Trustees should therefore be “How much risk do we need to continue to take to meet our objectives?”. 

 Mr Baker added, “Looking back through 2017, risk management has certainly been a focus for schemes over the year, and we would expect this to continue into 2018. In particular member option exercises are becoming an increasingly common way of companies looking to reduce balance sheet risk, by transferring out benefits whilst providing members with more choice. In our experience members are reacting positively to having this choice supported by clear communication and quality financial advice.”

 Le Roy van Zyl, Partner and strategy specialist at Mercer commented: “We are seeing a significant number of our schemes now in a much better financial position than they anticipated. Quite a few are taking rapid action to consider their options and deciding how to best take advantage of this position. Given how quickly things have changed, and indeed the potential for material setbacks, trustees and sponsors are finding that their previous risk and cost management plans are no longer the best on offer. We want to urge decision makers to approach this situation with a holistic mindset, making sure they challenge themselves to consider the range of feasible actions on offer, not just the traditional ones. Significantly, given the improvement in the IAS 19 funded status of FTSE350 pension plans during 2017, we estimate that 2018 profits could improve by c. £500m for FTSE350 companies due to lower pension costs. This expected P&L improvement could create some headroom for companies to transfer pension risk off their balance sheet.”

 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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