The accounting deficit for defined benefit (DB) pension schemes at the UK’s top 350 organisations has decreased by £16 billion in a single month, reaching £34 billion as of May 2018, according to research by Mercer.
Its research, which analyses pension deficits calculated using the approach FTSE 350 organisations have to adopt for their corporate accounts, also found that the accounting deficit for the FTSE 350’s DB pension schemes has fallen by £38 billion since the beginning of the year, from £72 billion in January 2018 to £34 billion in May 2018. This is compared to the recorded accounting deficit for DB schemes at the FTSE 350 for September 2016, which stood at £156 billion.
Liability values reduced by £1 billion at the end of May 2018, falling to £825 billion. Asset values increased by £15 billion, reaching £791 billion in May 2018.
Alan Baker (pictured), partner and chair of the DB policy group at Mercer, said: “This is great news for both pension schemes and [organisation] sponsors with yet another reduction in the pension gap, but we must not be complacent. Market swings could dramatically reverse these improvements and have done so in the past.
“Therefore, it’s important that trustees and sponsors understand the risks they’re exposed to and have the right strategies in place to lock in these gains. As highlighted by The Pensions Regulator through integrated risk management, it’s crucial to have contingency arrangements and plans in place.
Le Roy van Zyl, partner and strategy adviser at Mercer, added: “While this is more welcome news, recent market volatility sparked by the political situation in Italy serves as a timely reminder of the speed at which things can change.
“We increasingly see schemes having an action focused risk and cost management plan. Such a plan will be clear on the conditions under which specific activities will be warranted, [for example] member options, insurance market solutions, and cashflow matching asset strategies. Increased market uncertainty, as we are seeing at the moment, then feeds into this plan and consequently the sequence of activities.”
