May’s fall in accounting deficits of the UK’s 350 largest listed companies was driven by a combination of rising asset prices and a slight fall in liabilities. Asset valuations increased by £15 billion to £791 billion, while liabilities reduced by £1 billion to £825 billion as a result of a fall in the expectation of inflation offset by lower corporate bond yields.
Alan Baker, Partner and Chair of Mercer’s DB Policy Group, said: “This is great news for both pension schemes and company sponsors with yet another reduction in the pension gap, but we must not be complacent. Market swings could dramatically reverse these improvements and have done so in the past. Therefore, it’s important that Trustees and sponsors understand the risks they’re exposed to and have the right strategies in place to lock in these gains. As highlighted by the Pensions Regulator through integrated risk management (IRM), it’s crucial to have contingency arrangements and plans in place.”
Le Roy van Zyl, Partner and Strategy advisor at Mercer, added: “While this is more welcome news, recent market volatility sparked by the political situation in Italy serves as a timely reminder of the speed at which things can change. We increasingly see schemes having an action focused risk and cost management plan. Such a plan will be clear on the conditions under which specific activities will be warranted, e.g. member options, insurance market solutions, and cashflow matching asset strategies. Increased market uncertainty, as we are seeing at the moment, then feeds into this plan and consequently the sequence of activities.”
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.
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