FTSE 350 pension deficits increase

Assets held in the FTSE 350 defined benefit (DB) pension schemes have increased to £501 billion, while liabilities have increased to £574 billion, according to research by Mercer.

The research found that this is up from 2002, when assets stood at £282 billion and liabilities stood at £357 billion.

The data, which is taken from FTSE 350 company accounts, also found that average scheme funding levels have improved from 79% in 2002 to 80% in 2012. However, an estimated £175 billion, or 40% of the average asset value, in deficit contributions have been paid over the same period.

Adrian Hartshorn, partner in Mercer’s financial strategy group, said: “The analysis illustrates the impact of the sustained fall in bond yields, equity underperformance and improving longevity over the last 10 years.

“Even removing the impact of price inflation, 2012 liability values are much higher than they were in 2002, which can be accounted for by the falling bond yields and improving longevity.

“While defined benefit schemes appear to be in better health compared to 10 years ago, because the funding level is higher, big deficits remain despite very large company contributions over the period.”

Ali Tayyebi, senior partner at Mercer and head of UK DB risk, added: “Trustees and employers have much more of a handle on risk management than previously. 

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“There are also numerous solutions, which are either new or more accessible to many more schemes, such as bulk annuity purchases, various forms of liability management exercises, longevity hedging and special-purpose vehicles for asset-backed funding arrangements.

“Plenty of opportunities exist to manage risks without necessarily locking into low yields.”