Pension funding deficits 40% higher than last year

Empty-pocketPension scheme accounting deficits for FTSE 350 companies have risen 40% since the end of last year, putting pressure on pension managers to fill the funding gap.

The Pensions Risk Survey by consultancy Mercer says the £102 billion (€123 billion) deficit equals a funding level of 85%. This compares to 88% at the end of last year.

Combined assets of pensions fell by £3 billion in November to £563 billion while liability values also fell by £3 billion to £665 billion.

Mercer's numbers come days after the Pensions Regulator published a series of consultation documents, which include a revised code of practice on defined benefit funding policy.

Adrian Hartshorn, senior partner in the consultancy's financial strategy group, says understanding and managing of risks through an integrated approach “will require a further evolution of risk management activities for some trustees and sponsors”.

The fall in corporate bond yields, which was largely responsible for the increase in deficits during October, was reversed during November. However, Ali Tayyebi, head of defined benefit risk in the UK, says this did not lead to a material fall in the value of liabilities because the market’s expectation for long-term inflation increased.

Yet again circumstances have “conspired to keep accounting deficits stubbornly high”, says Tayyebi.

“Scheme deficits have remained high since the credit crisis, on both the accounting measure and the funding measure, and this is despite sponsors paying substantial contributions into UK pension schemes over the period,” he says.

“Pension scheme risks can be complex and the absence of a clear set of beliefs or objectives for managing these risks can result in detrimental financial outcomes for scheme sponsors.”

The Mercer data relates to about half of all UK pension scheme liabilities and analyses pension deficits using the approach companies have to adopt for their corporate accounts. Mercer says data published by the Pensions Regulator and elsewhere tells a similar story.

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