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The Actuary The magazine of the Institute & Faculty of Actuaries

FTSE 350 DB deficits rise £17bn yoy. despite £20bn contributions

The aggregate defined benefit pension deficit of FTSE 350 firms is now higher than a year ago, despite an estimated £20bn in company contributions, according to analysis by Mercer.


Mercer’s Pensions Risk Survey data showed that the FTSE 350 DB deficits remained broadly unchanged over the month of March, but the year-on-year picture highlighted the difficulties that companies have in managing their DB schemes in the face of market volatility.
The deficit figure stood at £81bn (equivalent to a funding ratio (FR) of 86%) at 31 March 2012, compared with £82bn at the end of February (FR 86%) and £73bn at the end of December 2011 (FR 87%).
Corporate bond yields, used to value the liabilities, increased marginally last month, resulting in a small decrease in liability values (to £571bn as at 31 March 2012), Mercer said.

This was offset by a small reduction in asset values (to £490bn as at 31 March 2012) so that the funding ratio and deficit remained broadly unchanged over the month.  
“Corporate bond yields went up for the first time in months and it is therefore the first time in a while that we have seen a small reduction in liability values,” said Ali Tayyebi, senior partner and pension risk group leader at Mercer.

“There has been reasonable calm over funding positions during the month, although the equity market falls over the last few days of March are a reminder that continued economic uncertainty may well mean continued volatility in funding positions as we go through the year

Adrian Hartshorn, partner in Mercer’s Financial Strategy Group, added that the continued deficit growth, despite contributions during the year, highlighted the potential downside of firms running a ‘mismatched investment strategy’.

“Even in this period of low interest rates there remain attractive opportunities for companies and trustees to reduce risk either through seeking some attractive investment opportunities or through managing the liabilities,” he said.

“Companies that take advantage of these opportunities will benefit from more stable and predictable future cash flows and less volatile deficits.”