FTSE 350 pension deficits rise to £98bn

The estimated aggregate deficit for the defined benefit (DB) pension schemes of FTSE 350 companies stood at £98 billion at 30 September 2013, according to research by Mercer. This is equivalent to a funding ratio of 85%.

Its Pensions risk survey found that asset values increased by £4 billion over the month, from £548 billion at 31 August 2013 to £552 billion at 30 September 2013.

The research also found that liability values increased by £4 billion over the month, from £646 billion at 31 August 2013 to £650 billion at 30 September 2013. 

Ali Tayyebi (pictured), head of DB risk in the UK at Mercer, said: “On the surface, it appears that September was a picture of calm, with long-term corporate bond yields and the market’s view of long-term inflation expectations all broadly unchanged from 31 August to 30 September. 

“However, this hides the fact that a combination of rises in the stock market and rises in long-term bond yields had reduced the deficit to around £78 billion on 11 September.

“More schemes now monitor their funding positions on a regular basis. The significant improvement in funding levels may well have triggered some changes to asset allocation to lock in some of the positive performance. In practice, however, many schemes are still not able to act quickly enough.”

Adrian Hartshorn, senior partner in Mercer’s financial strategy group, added: “With an increasing number of defined benefit pension schemes being closed not just to new entrants but also to future accrual, the primary focus for scheme sponsors and trustees is the ability to finance and pay future benefits.

“The ability of trustees to do this depends both on the contribution income from the [employer] and the investment income from the scheme assets. Despite significant contributions and financial support from many [employers], funding levels remain stubbornly low, driven primarily by low gilt yields.

“However, by actively considering a wider range of asset classes, relying less on low yielding gilts and taking advantage of temporary changes in market conditions, as were observed this month, trustees and [employers] are able to materially improve funding levels.”