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FTSE350 pension scheme deficits jump by 17 per cent during July

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Mercer’s Pensions Risk Survey data shows that the accounting deficit of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies increased from GBP81 billion at the end of June to GBP95 billion on 31 July 2015. 

This was driven by a fall in corporate bond yields, offset by a fall in market implied inflation and a positive asset return.

At 31 July 2015, asset values were GBP633 billion (representing an increase of GBP9 billion compared to the corresponding figure of GBP624 billion as at 30 June 2015), and liability values were GBP728 billion, the highest point in July, representing an increase of GBP23 billion compared to the corresponding figure of GBP705 billion at 30 June 2015.

“The FTSE100 returned around 2.5 per cent over July, recovering a lot of the ground lost in the last week of June.  This might have given hope for a continued improvement in the funding position over the month of July, says Ali Tayyebi, Senior Partner in Mercer’s Retirement business. “ However a relatively small reduction in yields available on long dated corporate bonds has meant that the deficit has in fact increased quite substantially over the month. It is particularly concerning that deficits have now edged very close to the last monthly high, as seen at the end of January 2015, despite corporate bond yields being nearly 65 bps higher than they were at that time.”   
                                      
Le Roy van Zyl (pictured), Principal in Mercer’s Financial Strategy Group, says: “It appears the end-June improved deficit position was a short-lived bounce, with volatility continuing in July and pension scheme deficits increasing significantly over the month. Despite the threat of a potential Grexit, the ongoing market issues really relate to the unfolding economic situation in China, and the timing of the US monetary tightening. For pension schemes, being prepared for both optimistic and pessimistic market scenarios remains key.”

Mercer’s data relates to about 50 per cent 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.

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