August saw the largest monthly increase in FTSE 350 pension deficits in the year so far, with a rise of over £10bn, Mercer has revealed.
According to Mercer's Pensions Risk Survey, the accounting deficit of defined benefit pension schemes for the UK's 350 largest listed firms grew by £12bn from £71bn at the end of July to £83bn on 31 August 2017.
As at the end of August, liability values rose by £27bn to £855bn from £828bn at the end of July. Asset values also an increase of £15bn month-on-month to £772bn from £757bn at 31 July 2017. The rise in asset values partially offset in the increase in liabilities and the fall in corporate bond yields and increased inflation expectations also led to growing liabilities over the month, Mercer noted.
Mercer senior partner Ali Tayyebi said: “Despite a £15bn increase in asset values, August saw the largest monthly increase in deficits so far this year. This was largely driven by a reduction in corporate bond yields, which together with a small increase in market expectations for long-term inflation, meant that liability values increased by over 3% in just one month. This experience again emphasises the potential value of taking an active approach to monitoring the funding position and spotting opportunities to manage risks when circumstances are supportive of doing do.”
Mercer strategic adviser and partner Le Roy van Zyl added: “Unfortunately the run of good news ended over August with the deficits increasing again materially, albeit still far off the painful numbers we saw a year ago in the aftermath of the EU referendum.
"With the Brexit negotiations now underway in earnest, there is considerable scope for people’s expectations to be frustrated, and the setback above may well be partly due to the general uncertainty. Pension scheme trustees and sponsors will need to be prepared for the fluctuating circumstances, not only in terms of scheme finances and risk, but also around the challenges of making effective decisions against this uncertain backdrop.
"A range of outcomes are possible and it is key that schemes work through some scenarios to establish whether there are material dangers under any of them to the scheme. If there are, they need to work together to identify and put in place pragmatic mitigating measures”.
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.