The accounting deficit of defined benefit (DB) pension schemes for the UK largest 350 companies increased in 2013, according to research by Mercer.
Its Pensions risk survey found that the FTSE 350 companies’ deficit stood at £97 billion at 31 December, compared to £72 billion at 31 December 2012.
There was an improvement in the position over the last month of 2013, with the deficit reducing from £102 billion at 30 November.
The data included in the research is based on publicly-disclosed accounting liabilities, which showed that deficits on this measure increased over 2013.
But, two other measures of the financial position of pension schemes show that deficits declined in 2013; the funding measure, used by trustees and employers to determine the amount of contributions that need to be paid to schemes; and the solvency measure, used to determine the cost of insuring pension scheme liabilities with insurance companies.
Ali Tayyebi (pictured), head of DB risk in the UK at Mercer, said: “Over 2013, as a whole, it has been interesting to see how the three key elements that drive the deficit calculation have independently influenced the deficit.
“Deficits increased sharply up to the end of April, driven largely by increases in the market’s outlook for long-term market-implied retail prices index (RPI) inflation. This was driven in part by the market reacting to the 10 January announcement by the Office for National Statistics confirming that the RPI calculation would not be changed.
“The position had recovered by mid-year as corporate bond yields increased sharply over [quarter two], reducing the value placed on pension scheme liabilities. However, a further increase in long-term market-implied inflation and a reversal of some of the increase in corporate bonds yields increased deficits by £20 billion over the second half of the year, despite the UK stock market returning 10% over that period.”
Adrian Hartshorn, senior partner in the financial strategy group at Mercer, added: “Based on work that Mercer carries out with [employer] clients, evidence suggests a reduction in funding deficits and solvency deficits, even as accounting deficits have increased.
“This highlights the need for employers and pension scheme trustees to understand the distinct elements that drive changes to the funding position which are most relevant to them, and the benefits of a potentially dynamic plan for managing or mitigating these risks.”
