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The Actuary The magazine of the Institute & Faculty of Actuaries

FTSE 350 DB pension deficit halves in 2018

The UK’s 350 largest listed companies have seen their pension schemes’ accounting deficits fall by more than half so far this year, analysis from consultancy firm Mercer shows.

Combined deficit had fallen from £72bn to £32bn ©Shutterstock
FTSE 350 pension deficit halves ©Shutterstock

The combined deficit for defined benefit (DB) schemes fell from £72bn at the start of the year to £32bn on 31 July, although this was up on the £29bn shortfall recorded at the end of June.

An increase in market implied inflation caused liabilities to rise from £818bn to £826bn by the end of last month, but that this was offset by asset values climbing from £789bn to £794bn.

The funding level remained at 96%, however, Mercer senior partner Ali Tayyebi said schemes using gilt yields to measure funding positions might not have seen as big an improvement.

“Trustees typically use gilt yields for measuring the funding position and setting contribution rates,” he said. “Gilt yields have not risen as much as corporate bond yields since the start of the year.

“Nevertheless, trustees and employers need to continue to ask themselves how much risk they need to take to meet their objectives.”

Mercer’s analysis relates to around half of all pension scheme liabilities, and analyses deficits using the same approach companies adopt for their corporate accounts.

The consultancy expects 2018 to be a record year for pension risk transfer due to improved funding levels, attractive pricing, and uncertainty over Brexit driving risk reduction.

This comes after Bank of England governor Mark Carney told the BBC today that the chances of the UK crashing out the EU without are deal “uncomfortably high” and “highly undesirable”.

Mercer strategic advisor, Le Roy van Zyl, said: “Uncertainty over the outcome of the Brexit negotiations means there is a clear need for trustees and sponsors to be prepared for fluctuating circumstances. 

“This preparation should focus on scheme finances and risk, but also the challenges of making effective decisions against this uncertain backdrop.”

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