The accounting deficits of FTSE350 defined benefit (DB) schemes increased over the month of March to £79bn (equivalent to a funding ratio of 87% at 31 March 2013), despite continued growth in equity markets during March, Mercer’s latest Pensions Risk Survey data shows.

This compares to £68bn-worth of deficit at the end of February 2013 (funding ratio of 89%); and represents an increase from £75bn at the close of January 2013 (funding ratio of 88%).

Mercer’s data of around 50% of all UK pension scheme liabilities indicates that the drop in the funding level, relative to the position at 28 February 2013, more than reverses the increase in funding levels that occurred during February.

Mercer said that this was down to reduced corporate bond yields.
In addition, the estimated value of underlying pension scheme assets increased from £544bn at 28 February 2013 to £552bn at 31 March 2013.
Mercer head of DB risk in the UK Ali Tayyebi said: “Following improvements in February driven by the strong equity market rally, funding levels have dropped back to below January results. The decline in corporate bond yields and the corresponding increase in scheme liabilities, from £612bn at the end of February to £631bn at the end of March (a rise of more than 3%), has substantially outweighed the increase in asset values from £544bn to £552bn over the same period.

“This yo-yo effect, clearly demonstrates the extent of current volatility in markets and funding levels. It also demonstrates the opportunities available if you have the appropriate governance processes in place to take advantage and lock in gains. Trustees and companies need to work together in order to align objectives and agree a strategy for financing scheme liabilities. Volatility means that funds with a pro-active and dynamic asset allocation strategy could now be several percentage points ahead, in funding level terms, of those that don’t have such structures in place.”

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