Better news on pension scheme deficits

The accounting deficit of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies fell from £78bn at the end of November to £64bn on 31 December 2015, reports Mercer.

In its latest monthly Pensions Risk Survey the consulting firm attributed the improvement to a fall in liabilities, although it was offset slightly by a reduction in asset values.

Mercer’s Pensions Risk Survey data shows that at 31 December 2015, asset values were £640bn (down from £646bn a month earlier), and liability values were £704bn against £724bn previously.

Year-on-year (YoY), the overall deficit fell to £64bn, from £74bn at 31 December 2014 with the improvement primarily driven by increases in asset values over the year from £624bn to £640bn. Increases in bond yields during 2015, which would reduce liabilities, were offset by increases in market expectations of inflation resulting in a slight rise in liabilities from £698bn to £704bn.

“The year ended of a positive note with deficits reducing over the month of December,” said Ali Tayyebi, senior partner in Mercer’s retirement business. “However deficits have remained at broadly the same level now for the last four calendar year ends going back to the end of 2012, and this highlights that progress towards a genuine and sustained improvement in funding positions has been a challenge for some time.

“The fall in global stock markets, precipitated by the sharp fall in the Chinese stock market on the first trading day in 2016, points to this challenge continuing for some time yet. That being the case, then effective risk management is more likely to be about small well-timed steps, rather than waiting for a major improvement in conditions, combined with effective monitoring to spot opportunities for risk reduction and risk transfer.”

Le Roy van Zyl, Principal in Mercer’s financial strategy group, said, “With slightly improved funding levels December had better news for pension schemes and sponsors. However, ‘one swallow does not make a summer’, and looking at the coming year, there is unfortunately considerable scope for downside, with a number of political and economic flashpoints across the globe.

“Pension schemes still have significant exposures to market conditions and both trustees and sponsors are likely to become increasingly focused on how this financial exposure and other costs can be better managed. In our experience, there are typically significant steps that can be taken to improve risk mitigation and therefore control cost over the short and long term.

“This is reinforced by the [UK] Pensions Regulator’s recent Integrated Risk Management guidance which emphasises the need for looking at solutions that incorporate all key areas of potential emphasis. This means that trustees and sponsors typically have to “up their game” – and make sure their plans are documented.”

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