Pension deficits widen thanks to volatility

Empty-pocketStock markets may have had one of their best first quarters of the 21st century, but UK defined benefit (DB) pension schemes saw a £17 billion (€20.5 billion) increase in deficits over the past 12 months – and that even takes into account £20 billion of contributions paid into them.

Mercer, a pensions consultancy, estimated that the deficit in FTSE 350 companies had increased to £81 billion in the 12 months to 31 March from £64 billion.

The firm said this highlighted the difficulty that companies have in managing their DB schemes in the face of market volatility.

The estimated £81 billion deficit under IAS19 accounting measures means schemes have a funding ratio of 86%.

In March corporate bond yields, which are used to value pension liabilities, increased marginally resulting in a small decrease in liability values to £571 billion (as at 31 March). But this was offset by a small reduction in asset values to £490 billion so that the funding ratio and deficit remained broadly unchanged over the month, Mercer data showed.

Equity market falls over the last few days of March were a reminder that continued economic uncertainty may well mean continued volatility in funding positions throughout this year, said Ali Tayyebi, pension risk group leader at Mercer.

Adrian Hartshorn, also of Mercer, said the fact that payment of £20 billion in contributions failed to move the deficit highlighted the potential downside of running a mismatched investment strategy.

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.

Stock markets have performed strongly this year. MSCI Indices saw “one of the best first quarters of this nascent 21st century”, MSCI said today (see separate story).

©2012 funds europe