While the deficits of the 200 largest defined benefit (DB) schemes improved by 25 per cent in July, FTSE 350 pensions’ funding recovery has been dogged by June’s market turmoil and falling corporate bond yields, says Mercer.

The financial consultant found that at the end of Q2 2010, FTSE 350 pension deficits stood at £85bn, unchanged from the end of Q1. Mid-June saw global equity markets rise, which lead to an increase in the value of assets held by company pension schemes.

However, corporate bond yields rose at the same time, and the market’s expectation of inflation fell, which Mercer said are the main drivers of pension liabilities. In turn, lower values were place on companies’ pension commitments, and the data in Mercer’s Pension Risk Update showed that, at 16 June 2010, FTSE 350 pension scheme deficits were estimated at around £60bn.

However, the situation then changed, and market turmoil saw pension fund assets fall by around £10bn, while falling bond yields added an extra £15bn to pension scheme liabilities.

Dr Cooper, head of Mercer’s retirement research group, explained: “With less income available from corporate bonds, pension schemes were required to find other ways to cover their existing liabilities. Overall these factors balanced out the gains made in previous months by around £25bn. The ‘saving grace’ for defined benefit pension schemes was a fall in the expected future level of inflation.”

Focus by governments on spending cuts and tax rises to tackle debt crises could hamper future growth prospects and trigger a ‘double-dip’ recession, said Mercer, as well as risking future deflation.

“Companies and trustees must be agile enough to seize de-risking opportunities when possible. Many have already taken a variety of steps to de-risk ensuring more stability in their funding levels but they are still glaringly exposed to economic factors such as global investment markets and future inflation. Without an effective risk management strategy and the capability to monitor and implement markets and future inflation. Without an effective risk management strategy and the capability to monitor and implement changes quickly, companies and trustees will be unable to take advantage of market opportunities as they arise,” Cooper added.

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