The rise from £81bn at 30 June to £95bn on 31 July was caused by a fall in corporate bond yields, offset by a fall in market implied inflation and a positive asset return. Asset values were up £9bn at £633bn in the same period, and liability values were at £728bn, their highest point in July, up from £705bn at the end of June. Mercer says a relatively small reduction in yields available on long dated corporate bonds has meant that the deficit increased substantially month-on-month.
Mercer senior partner Ali Tayyebi says: “The FTSE100 returned around 2.5 per cent over July, recovering a lot of the ground lost in the last week of June. This might have given hope for a continued improvement in the funding position over the month of July.”
“It is particularly concerning that deficits have now edged very close to the last monthly high, as seen at the end of January 2015, despite corporate bond yields being nearly 65 bps higher than they were at that time.”
Mercer principal Le Roy van Zyl says: “It appears the end-June improved deficit position was a short-lived bounce, with volatility continuing in July and pension scheme deficits increasing significantly over the month. Despite the threat of a potential Grexit, the ongoing market issues really relate to the unfolding economic situation in China, and the timing of the US monetary tightening. For pension schemes, being prepared for both optimistic and pessimistic market scenarios remains key.”Barnett Waddingham head of corporate consulting Nick Griggs says: “Whilst deficit contributions have fallen to the lowest level since our research began in 2009 they still represent a significant cost for what is largely becoming a legacy benefit. The impact on shareholders, who might reasonably expect a 13 per cent increase in their annual dividend were DB schemes not to exist, remains substantial. The impact on business investment is impossible to quantify but the persistence of these deficits despite the contributions being paid must be having an impact for some in the FTSE350.”
