Accounting deficits of defined benefit pension schemes for FTSE 350 companies increased for the third consecutive month over May, driven by a fall in long-dated corporate bonds yield, according to Mercer.
Publishing its monthly Pensions Risk Survey today, the firm said that deficits grew by £2bn to £113bn despite a rise is asset values - equivalent to a funding ratio of 84% - when measured using the IAS19 accounting rules. This compared to a total deficit of £111bn at the end of April.
Assets were up by £8bn at the end of May to £583bn, compared to £575bn in the previous month but liability values increased by £10bn to £696bn, compared to £686bn in April. This was due to a fall in corporate bond yields, however, its effect was partially offset by a fall in market expectations for long-term inflation, Mercer said.
Ali Tayyebi, senior partner in Mercer's retirement business, said: 'The experience over the month of May has been an unfortunate repeat of April in many respects. Asset values increased over the month, but this was outpaced by a larger increase in liability values, resulting in an increase in the overall deficit.
'The widening gap between the asset and liability values also means that the asset base now has to work that much harder in relative terms to the liabilities for the deficit to stand still or improve.'
But a more positive picture of FTSE 350 companies' ability to manager their DB pensions was provided today, by PricewaterhouseCoopers. The firm said companies' ability to support their DB pension promises had 'dramatically' returned towards pre-recession levels thanks to the economic recovery.
PwC's Pension Support Index improved by seven points over the second half of 2013, reaching a score of 83 out of a possible 100. This was the largest positive six-month improvement in its index since December 2009 and only five points away from the pre-recession index high in June 2007 of 88.
The change was attributed to improvement in company performance and an upswing in gilt yields (10-year UK gilts improved from 1.4% in July 2012 to 3% by the end of December 2013), which lowered the present value of future pension liabilities for companies.
Jonathon Land, pension credit advisory leader at PwC, said: 'The increase in score is an opportunity for companies and trustees to refresh their scheme's investment strategy in light of their strengthened employer covenant.'
However, this movement is not universal the consultants said. Around 10% of FTSE 350 companies with DB schemes still have individual scores of less than 50, which indicate that their pension deficit is still large when compared to the financial strength of their company.