Defined benefit deficits among the UKs largest firms increased by £25bn over 2013 despite significant employer contribution and strong stock market returns, Mercer said.
Its monthly Pensions risk survey found that schemes sponsored by companies in the FTSE 350 index saw their accounting deficit rise by 35% to £97bn at the end of December, equivalent to an 85% funding deficit. This figure came in spite of a 19% rise in UK equities.
This compares to a deficit level of £72bn recorded by Mercer at the end of 2012 and corresponding to a funding level of 88%. There was however an improvement in the position over the month of December 2013, with the deficit reducing to £97bn from £102bn at the end of November.
Ali Tayyebi, head of DB Risk in the UK, said: 'Over 2013 as a whole it has been interesting to see how the three key elements which drive the deficit calculation have independently influenced the deficit. Deficits increased sharply up to the end of April driven largely by increases in the market's outlook for long-term market implied Retail Prices Index inflation. This was driven in part by the market reacting to the January 10 announcement by the Office of National Statistics confirming that the RPI calculation would not be changed.'
Tayyebi added that the position had recovered by mid-year as corporate bond yields increased sharply over Quarter 2 reducing the value placed on pension scheme liabilities.
'However, a further increase in long-term market-implied inflation and a reversal of some of the increase in corporate bonds yields increased deficits by £20bn over the second half of the year despite the UK stock market returning 10% over that period,' he continued.
Mercer noted that, while the accounting measure of pension scheme liabilities showed that deficits had continued to increase over 2013, two different measures - the funding measure and the solvency measure - showed that deficits were declining.
'This highlights the need for employers and pension scheme trustees to understand the distinct elements which drive changes to the funding position that are most relevant to them, and the benefits of a potentially dynamic plan for managing or mitigating these risks,' said Adrian Hartshorn, senior partner in Mercer's financial strategy group.
He added that 2014 was likely to see more schemes transferring risk to the insurance market through more buy out and longevity transactions.
'However, there are also likely to be other transactions and exercises implemented by scheme sponsors, such as options that allow pensioners and deferred pensioners additional flexibility in the way they draw their benefits.'