Defined Benefit  

FTSE350 pension deficit halves in 2018

FTSE350 pension deficit halves in 2018

The gap in pension funding in FTSE350 firms has more than halved since the start of 2018, according to consultancy firm Mercer.

The pension deficit improved by a total of £40bn, from £72bn at the start of the year to £32bn on 31 July, data from the firm suggests.

However, the defined benefit deficit has increased by £3bn since the end of June 2018 when it stood at £29bn, but funding levels remained the same at ninety-six per cent.

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Mercer’s report showed the total value of liabilities increased from £818bn at the end of June 2018 to £826bn at the end of July due to an increase in implied market inflation.

The increase in liability was offset by a rise in asset value, which increased from £789bn in June to £794bn to July.

In light of Brexit uncertainty, pension scheme trustees and sponsors have been told to prepare for fluctuating circumstances by focusing on scheme finances, Mercer stated.

Le Roy van Zyl, strategic adviser and partner at Mercer, said: "Whilst July saw the deficit remain stable, continued uncertainty over the outcome of the Brexit negotiations means there is a clear need for pension scheme trustees and sponsors to be prepared for the fluctuating circumstances.

"This preparation should focus on scheme finances and risk but also the challenges of making effective decisions against this uncertain backdrop. A range of outcomes are possible and it is important that schemes work through scenarios to establish whether there would be a material impact to their scheme under any of the scenarios."

Mercer analyses pension deficits calculated using the approach companies have to adopt for their corporate accounts.

Ray Black, managing direct and financial planner at Money Minder, said: "The data is another example of market volatility changing figures significantly in a short space of time.

"What we can expect going forward really depends on how funds are invested, but we can expect more volatility and more opportunity for the deficit to be reduced further if trustees are able to invest in the right markets."

The data compiled by Mercer is refreshed as companies report their year-end accounts. Other measures are also relevant for trustees and employers considering their risk exposure. But data published by the Pensions Regulator and elsewhere tells a similar story, Mercer said.

Ali Tayyebi, senior Partner at Mercer, said: "The big reduction in accounting deficits so far this year is welcome news.

"However pension scheme trustees typically use gilt yields as a basis for measuring the funding position and setting contribution rates. Gilt yields have not risen by as much as corporate bond yields since the start of the year therefore trustees may not have seen the same degree of improvement on funding valuations.

"Nevertheless, trustees and employers need to continue to ask themselves how much risk they need to take to meet their objectives."