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The Actuary The magazine of the Institute & Faculty of Actuaries

Falling inflation assumptions check FTSE350 pension deficits rise

Pensions deficits for FTSE350 companies grew by 21% in September as falling bond yields and volatile stock markets were mitigated by a reduction in interest rate projections.

The figures, from Mercer's Pensions Risk Survey, show the aggregate shortfall climbed to £64bn on an IAS19 basis by the end of the month, up from £53bn at the end of August.

The firm said falling bond yields, which are used to determine discount rates, and falls in the stock market would ordinarily be expected to have a greater effect on the funding levels.

However, the market expectation of longer-term price inflation has also decreased significantly and partially offset the effects of this.

Mercer financial strategy group partner Adrian Hartshorn said: "The events of the last month highlight the interplay of the various factors affecting the calculation of the deficit in pension schemes."

The £64bn aggregate deficit equates to funding ratio of 88%, just 2% lower than the 90% reported in August, and at the beginning of the year.

The consultant also observed that a large proportion of most defined benefit schemes' funds were invested in return seeking assets which often had a low correlation with changes in liabilities.

It said this meant timely monitoring of the changing market environment was important to capture market opportunities.

Senior partner and defined benefit risk group leader Ali Tayyebi said: "To manage the effects defined benefit schemes can have on company balance sheets and on their bottom line, companies should consider collaborating with scheme trustees to develop risk management strategies that meet their objectives.

"In doing so, they need to be proportionate to the relative importance of the pension plan on the company's financial and reporting position."

Source: Professional Pensions