DB deficits fall 16 per cent in four months

Deficits on FTSE350 companies’ pension schemes have fallen by more than 16 per cent since April, but still remain more than 20 per cent above their pre-Brexit level, figures from Mercer show.

The accounting deficits of the UK’s 350 biggest companies fell to £122bn in July, down £9bn from June’s figure of £131bn, and £23bn lower than the £145bn recorded at the end of April 2017.

Mercer says the steady decline in deficits has left some sponsors pleasantly surprised, opening opportunities to risk reduction strategies.
The Brexit vote saw FTSE350 deficits increase from £98 billion on 31 May 2016 to £119 billion at the end of June in the aftermath of the Brexit vote.

Liabilities fell £4bn to £865bn at the end of July 2017, compared to £869bn at the end of June 2017. Asset values were £743bn at the end of last month, an increase of £5bn on the previous month.

Mercer senior partner Ali Tayyebi says: “The welcome trend of improvements in the deficit over recent months continues during July. This was largely driven by a small reduction in market expectations for long-term inflation which reduces the pension liability values. An increase in asset values also helped to further improve the funding deficits over July. As past experience has shown, periods of steady improvements can be reversed quickly. The most important question for most pension schemes should therefore be about getting the right balance between protecting improvements in their funding position and relying on continued out-performance from risk based or unmatched asset strategies.”

Mercer partner and strategic adviser Le Roy van Zyl says: “There have now been a few months of good news. We are seeing trustees and sponsors with robust governance mechanisms in place taking advantage of these opportunities. Indeed, with the more favourable circumstances, some have been pleasantly surprised by how much their long-term strategic plan has progressed. The intention is of course to strengthen pension scheme finances against the possibility of conditions deteriorating again. Under an effective integrated risk management framework there is now much more freedom to consider a wide range of actions, and many trustees and sponsors are therefore already seeing the benefit come through from their effort in setting up such a framework.”