The estimated aggregate IAS19 deficit for the DB schemes of FTSE350 companies stood at £116 billion (equivalent to a funding ratio of 83%) at 31 July 2014 compared to £112 billion (equivalent to a funding ratio of 84%) at 30 June 2014, according to data from Mercer.
Mercer’s Pensions Risk Survey data shows that the accounting deficit of defined benefit (DB) pension schemes for the UK’s largest 350 companies increased significantly during July.
At 31 July 2014, asset values were £583bn (representing an increase of £2bn compared to the corresponding figure of £581bn as at 30 June 2014), and liability values were £699bn (representing an increase of £6bn compared to the corresponding figure of £693bn at 30 June 2014). As at 31 December 2013, pension scheme deficits stood at £96bn corresponding to a funding ratio of 85%.
"Despite intermittent improvements in funding levels, the broad trend of a gradually increasing month-end deficit, witnessed since the start of the year, continued over July," said Ali Tayyebi, Senior Partner in Mercer’s Retirement business. "Employers’ cash contributions are decided based on the scheme’s deficit, which in turn is calculated based on funding levels agreed between the employer and the trustees.
So for many companies this deficit is now often considerably lower than the IAS19 accounting deficit that they are required to calculate and report on in their accounts. The gap between these two deficits is unlikely to shrink unless there is a significant change in financial market conditions."
Adrian Hartshorn, Senior Partner in Mercer’s Financial Strategy Group, added: "As the fall in funding levels used for accounting purposes is not being mirrored in the funding levels used by scheme trustees to determine cash contributions, there are opportunities for pension scheme sponsors to negotiate lower cash contributions and also to take advantage of higher funding levels by implementing risk management actions through changes to investment strategy. They can also take advantage of the additional flexibility introduced by the Chancellor’s March Budget now confirmed by the subsequent consultation exercise."
Mercer’s data relates to about 50% of all UK pension scheme liabilities and analyses pension deficits calculated using the approach companies have to adopt for their corporate accounts. The data underlying the survey is refreshed as companies report their year-end accounts. Other measures are also relevant for trustees and employers considering their risk exposure. But data published by the Pensions Regulator and elsewhere tells a similar story.