FTSE 350 defined benefit pension deficits fell by £3bn from £152bn at the end of September to £149bn on 31 October 2016, Mercer reported.

In its Pension Risk Survey, Mercer highlighted that deficits fell following an increase in corporate bond yields, while increased inflation expectations “put a dampener” on pension scheme funding levels.

At 31 October, asset values were £711bn, a £9bn downfall on the previous month which stood at £720bn. In addition, liability values fell by £12bn from £872bn at the end of September to £860bn in October.

Mercer’s data relates to about 50 per cent of all UK pension scheme liabilities and assesses pension deficits using the approach companies have to adopt for their corporate accounts.

Mercer Retirement business senior partner Ali Tayyebi said: “It is perhaps not a surprise that the fall in the value of sterling has now lead to an increase in the expectations for long-term inflation with the market implied inflation from gilt yields now at its highest level since 2011.”

“This has been accompanied by an arguably related rise in fixed interest gilt and bond yields with a corresponding reduction in the value of those assets. The net effect is an improvement in total deficits over the month but the position is likely to vary from scheme to scheme.”

Mercer financial strategy group, senior consultant Le Roy van Zyl, added: “Rising inflation expectations have put a dampener on what would otherwise have been a good month for pension scheme funding levels. Despite promising signs for developed market economies, the uncertainty around Brexit for UK inflation, interest rates and growth orientated assets means that trustees and sponsors must continue their vigilance. This will particularly be the case if there is a sense that the outlook for the sponsor’s business has been adversely affected.”

“Given that clarity around Brexit will not emerge for some time to come, it is important that trustees and sponsors now work through the various potential scenarios and arrive at appropriate outcomes for all. In this way there is still time to take steps to contain risk at an acceptable cost,” van Zyl added.

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