FTSE 350 DB pension deficit swings into surplus amid volatility

The accounting position of defined benefit (DB) pension schemes in the FTSE 350 swung from a £68bn deficit at the end of February 2020 to a surplus of £10bn on 31 March, Mercer has revealed.

Mercer’s Pension Risk Survey found that this was primarily driven by a £119bn reduction in liability values during March 2020, from £914bn to £795bn.

However, this was partially offset by £41bn fall in assets during the same period, down to £805bn.

Mercer primarily attributed the decline in liabilities to a “significant increase” in corporate bond yields, alongside the accounting rules on how pension liabilities are measured being affected by market volatility.

The firm urged trustees to plan ahead and be vigilant as the Covid-19 pandemic continues to affect the UK economy.

Commenting on the figures, Mercer partner and corporate consulting leader, Maria Johannessen, said: “The dramatic fall in liabilities was mainly caused by the significant increase in corporate bond yields.

“The fall will affect the pension costs companies recognise in their accounts but is unlikely to impact the funding measures used by trustees.

“These will have experienced substantial worsening over the past month as government bond yields did not see the same increases as corporate bonds.”

The survey’s data relates to around 50 per cent of all UK pension scheme liabilities and analyses pension deficits calculated using the approach companies have to adopt for their end of year accounts.

Mercer partner, Charles Cowling, added: “The current economic crisis caused by the coronavirus pandemic is sending shock waves through global financial markets and disrupting international trade and supply chains.

“Against this backdrop, it may be surprising that pension deficits have turned into surpluses. This is due to the accounting rules on how pension liabilities are measured for company accounts. This does not affect how trustees, or The Pensions Regulator, look at pension deficits.

“The squeeze on interest rates down to record low levels, means pension liabilities as measured by trustees are increasing just as pension assets are falling. 2020 will therefore be a challenging year for actuarial valuations and trustees are urged to start their planning early.”

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