The aggregate deficit of UK companies defined benefit pension schemes increased by £6bn in October driven by falling bond yields, Mercer said today.
According to the consultancy's latest risk survey, the estimated deficit of the FTSE 350 companies' pension schemes stood at £102bn at the end of last month. Mercer's figures use the IAS19 accounting measure and relate to around 50% of all UK pension scheme liabilities.
While asset values increased by £13bn over the month to £566bn, liabilities too increased by £19bn over the same period to £668bn at the end of October.
Ali Tayyebi, Mercer's head of DB risk in the UK, said: 'It will come as a surprise to many that despite the visibly strong asset returns over the month, deficits have still increased compared to the position at the end of September.
'The increase in UK equity values by over 4% helped overall asset values increase by £13bn over the month. However a further narrowing of credit spreads has resulted in an increase in the value places on IAS19 accounting liabilities.'
Looking ahead, Tayyebi added that, for companies who have December 31 year-ends, the 'stubbornly' high accounting deficits would have a detrimental impact on earnings for 2014.
He said: 'There has also been a noticeably different trend between deficits on the IAS19 basis and the trustee funding deficits which pension scheme trustees and sponsors use to determine contributions. The latter are typically driven by yields on government bonds and have generally improved since the end of Q1 of this year.'
In contrast, accounting deficits have increased, principally due to a reduction in credit spreads. According to Tayyebi the improvement in funding deficits is likely to lead to talks between trustees and corporate sponsors on how the improved position can be used to benefit both parties. Proposed options include: reduced employer contributions; shorter recovery periods and; or some accelerated de-risking.
Adrian Hartshorn, senior partner in Mercer's financial strategy group, noted that even though funding levels had improved there was an increased focus on 'locking in' some of the gains. 'Implementation of risk reduction strategies requires careful thought and planning in a market where there is divergence in return prospects for different asset classes,' he said.