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 reduced slightly from £160bn[1] at the end of August to £152bn on 30 September 2016. Corporate bond yields increased over the month, however the benefit of that was largely offset by a rise in market implied inflation.

At 30 September 2016, asset values were £720 (representing a fall of £5bn compared to the corresponding figure of £725bn as at 31 August 2016), and liability values were £872bn, representing a fall of £13bn compared to the corresponding figure of £885bn at 31 August.

“The net change in deficits from the start to the end of September has been relatively small compared to recent months but it does buck the trend of the straight increase in deficits month on month since February.  Even so, deficits have increased by over £100bn since the start of the year.” said Ali Tayyebi, Senior Partner in Mercer’s Retirement business. “As we approach the accounting year end for many companies we are getting nearer to the time that these deficits will now be crystallised on the balance sheet.”                             

Le Roy van Zyl, Senior Consultant in Mercer’s Financial Strategy Group, said, “September was another very volatile month in pension scheme financing. This volatility again underscores that schemes positioned for taking advantage of (frequently short lived) improvements in equity markets, interest and inflation rate market experience will have had valuable de-risking opportunities in recent months. Schemes who were able to transact are those that had pragmatic monitoring and execution frameworks in place.

“When deciding the best route forward, trustees and sponsors must clearly consider taking material steps to achieve cost-effective risk management; many clients have benefitted from a series of small but incremental changes over the course of the year. It is also interesting to note that despite these market conditions we are seeing continuing activity in the risk transfer market – the number of clients signing up to our online Pension Risk Exchange continues to grow and we are expecting a busy fourth quarter for the bulk annuity market ”, Mr van Zyl added.

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.