The FTSE 350 defined benefit deficit fell to its lowest month-end level since the start of 2017 and below that of April 2016 before the Brexit vote, Mercer has revealed.

According to Mercer’s monthly Pensions Risk Survey the DB accounting deficit of the UK’s 350 largest listed firms fell from £83bn at the end of August to £65bn on 29 September 2017.

Mercer found that at 29 September 2017, FTSE 350 pension scheme liabilities dropped by £34bn to £821bn from £855bn the month before, and asset values fell by £16bn to £756bn, compared to £722bn at the end of August 2017.

Over a year ago, deficits rose to a then record high of £165bn, highlighting the uncertainty among those faced with managing the financial risk of fluctuating assets and liabilities, Mercer added.

Mercer senior partner Ali Tayyebi noted that the significant fall in deficits has largely been driven by growth in yields on long-dated corporate bonds, which have led to the reduced calculation of liabilities used for reporting pension scheme deficits in company accounts.

“The increase in corporate bond yields mirrors the increase in government bond yields which are typically used by pension schemes to measure funding deficits - which are also therefore expected to have improved this month,” Tayyebi added.

In response to these findings, Mercer is calling on the UK pensions industry to “embrace digital disruption and big data to help manage the financial risk of the UK’s occupational pension schemes”.

Mercer partner Alan Baker explained that technology can work cohesively with data to manage scheme funding and fluctuating deficits.

Baker said: “Companies and trustees managing schemes full visibility of current assets, liabilities and funding levels as well as on future developments and foreseeable changes to any factors that might influence funding. Technology can work with data to provide this joined up and integrated perspective in a far more accessible, timely and easy to understand way.”

He added that this approach will complement the integrated risk management approach proposed by The Pensions Regulator, and although the implications big data will have cannot yet be grasped, “it will be profound”.

Although many schemes do now have mechanisms to benefit from improvements in the funding position, this needs to be more widespread, Mercer said.

Mercer partner specialising in strategic advice Le Roy van Zyl said: “The good news on funding levels may have come as a welcome surprise to trustees and sponsors, and it is clear that careful thought needs to be applied on how far to consolidate the position. This may be an ideal time to lock in some of the gains from exposures that have performed better than expected. As part of this, we are also finding that the better funding positions have made some trustees and sponsors turn their attention to when they should settle some of their risks with an insurer.”

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.

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