Year ends on bleak note for UK pension schemes

Pension nest egg 410The accounting deficit for UK defined benefit pension schemes rose by a third to £84 billion (€100 billion) during 2011, according to consultancy Mercer. The change was equivalent to a three-point fall in funding levels to 85%.

Mercer said the deficit increase was caused by a decline in corporate bond yields, which are used to discount liabilities. This decline increased the value of schemes' liabilities.

Ali Tayyebi, senior partner at Mercer, said the deficit increase meant 2011 ended on a “bleak note”. The increase came despite a rise in asset values, which ended the year at £478 billion, and a significant reduction in long-term inflation expectations.

Adrian Hartshorn, partner in Mercer’s Financial Strategy Group, said managing liability risk will be an important focus for many companies in the coming year.

“We expect to see the implementation of both traditional and non-traditional risk management strategies including interest-rate and inflation hedging, longevity hedging, liability management exercises or the use of non-cash funding options to smooth cash contribution requirements,” he said.

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