FTSE 350 pension scheme accounting deficits increase by £25bn

THE ACCOUNTING deficit of defined benefit pension schemes for the UK’s largest 350 companies increased over 2013, according to Mercer’s latest Pensions Risk Survey.

According to the data, the estimated aggregate IAS19 deficit for the defined benefit schemes of FTSE 350 companies stood at £97bn at 31 December 2013 compared to £72bn at 31 December 2012.

There was however an improvement in the position over the last month of 2013, with the IAS19 deficit reducing from £102bn at 30 November.

“A further increase in long-term market-implied inflation and a reversal of some of the increase in corporate bonds yields increased deficits by £20bn over the second half of the year despite the UK stock market returning 10% over that period,” said Ali Tayyebi, Mercer’s head of DB risk in the UK.

The data included in the Mercer analysis is based on publically disclosed accounting liabilities, and shows that deficits on this measure have increased over 2013. However, two other important measures of the financial position of pension schemes show that deficits have declined over 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.

“Based on work that Mercer carries out with clients, evidence suggests a reduction in funding deficits and solvency deficits, even as accounting deficits have increased,” said Adrian Hartshorn, senior partner in Mercer’s financial strategy group. “This highlights the need for employers and pension scheme trustees to understand the distinct elements which drive changes to the funding position that are most relevant to them, and the benefits of a potentially dynamic plan for managing or mitigating these risks.”