FTSE 350 pension scheme deficits increase by £17bn

Defined benefit (DB) pension scheme deficits in the FTSE 350 have increased by £17 billion, according to research by Mercer.

The consultancy’s Pensions risk survey highlighted the difficulties that employers have in managing their DB schemes in the face of market volatility.

The research estimated that the aggregate pension deficit of FTSE 350 companies is now higher than it was a year ago, despite an estimated £20 billion in company contributions. It stood at £81 billion at 31 March 2012, compared to £64 billion at 31 March 2011.

In March, corporate bond yields, which are used to value the liabilities, increased marginally, resulting in a small decrease in liability values (to £571 billion at 31 March 2012). This was offset by a small reduction in asset values (to £490 billion at 31 March 2012) so that the funding ratio and deficit remained broadly unchanged over the month.

Adrian Hartshorn, a partner in Mercer’s financial strategy group, said: “The £17 billion growth in the deficit over the last 12 months comes despite the payment of an estimated £20 billion by companies in contributions.

“This highlights the potential downside of running a mismatched investment strategy. Even in this period of low interest rates, there remain attractive opportunities for organisations and trustees to reduce risk, either through seeking some attractive investment opportunities or through managing the liabilities.

“Organisations that take advantage of these opportunities will benefit from more stable and predictable future cash flows and less volatile deficits.”

For more on managing DB pension scheme deficits