Mercer: Inflation Uncertainties Stall Pension Recovery

February, 2017

Mercer’s Pensions Risk Survey data shows that the accounting deficit of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies increased from £137bn at the end of December to £140bn on 31 January 2017.

At 31 January 2017, asset values were £714bn (representing a decrease of £6bn compared to the corresponding figure of £720bn at 30 December 2016), and liability values were £854bn (representing a fall of £3bn compared to the corresponding figure of £857bn at the end of December).

“Despite an improvement in corporate bond yields and a related decrease in liabilities we saw slight deterioration in funded status over January, with the deficit increased by £3bn over the month to £140bn,” said Alan Baker, UK DB Risk Leader for Mercer. “The positive effects of a reduction in liabilities of £3bn were offset by a drop in asset values of £6bn. There are real concerns as we move forward into 2017 particularly around inflation and trustees and sponsors should take every opportunity to understand their risk exposure and seek to manage it in line with their objectives and in line with the level of risk that the sponsor can support. The regulator’s Integrated Risk Management framework is crucial to developing the right plans and framework to deal with choppy waters ahead. No plan is not a good strategy.”

Adrian Hartshorn, a Mercer Senior Partner, commented, “Despite the relative stability in the funding level over the last 3 months, political uncertainty is driving increased uncertainty in financial markets. Trustees and Sponsors will need to think carefully about the impact on funding level, cash contributions and pension accounting numbers, and how some scenarios might lead to downside outcomes. Effective mitigations can then be considered through one of a variety of strategic solutions, either on the asset side or liability side of the balance sheet.”

Mr Hartshorn added that, “Clearly such actions are often best combined with measures to strengthen covenant protection by providing alternative security to the scheme rather than direct cash funding.”

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. The data underlying the survey 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.