The FTSE350 pensions deficit has increased by £20bn from £13bn at 31 December 2007 to £33bn, with a fourfold increase in the threat of default for the ten per cent of companies most at risk, says Mercer.

The financial consultant's latest quarterly snapshot of the UK's pensions market showed the impact that recent market volatility has had on company balance sheets. It also showed that the insolvency risk for the ten per cent of FTSE350 companies that are most in danger of defaulting has increase fourfold in the last quarter of 2008, and by a factor of 17 over the year.

AA bond yields have remained high but widely spread, making the selection of IAS19 discount rates a challenging task for companies reporting at the end of December 2008. Mercer said their research shows companies are continuing to adopt a variety of methodologies for deriving their discount rates, and estimate that the aggregate funding level of the FTSE350 is 92 per cent.

"There has been much uncertainty around assumption setting, especially with the diverse range of corporate bond yields at the year-end," commented Deborah Cooper, principal at Mercer. "As reports of falls in asset values being offset by falling liabilities over 2008 have made headlines, a number of people have questioned the suitability of accounting standards which rely on these yields.

"It should however be borne in mind that models used for accounting purposes are required to ensure different companies' financial statements are comparable. Even though it has come in for some criticism in recent months, the current approach, which relies on yields derived from AA rate corporate bonds provides a consistent and transparent way of measuring liabilities on corporate balance sheets," she added.

The report also found that deficits on the trustees' funding basis have also increased during 2008m, with the rise generally being greater due to the typical basis being driven by gilt rather than bond yields.

"The strength of sponsoring employers' covenants should be at or near the top of trustees' agendas. If economic uncertainty continues, and funding levels remain weak, trustees will have to balance putting pressure on sponsoring employers for additional security for scheme members while, at the same time, considering the effects on the company's financial strength and future prospects," Cooper concluded.

- Pensions Age January 2009

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