Mercer says the FTSE350 pension gap fell by £16bn in May to £34bn on an accounting basis, continuing the significant reductions achieved over the last two years. The gap stood at £72bn at the start of the year and was £156bn as recently as September 2016.
May’s fall in accounting deficits of the UK’s 350 largest listed companies was driven by a combination of rising asset prices and a slight fall in liabilities. Asset valuations increased by £15bn to £791bn, while liabilities reduced by £1bn to £825bn as a result of a fall in the expectation of inflation offset by lower corporate bond yields.
Mercer’s data relates to about 50 per cent of all UK pension scheme liabilities and analyses pension deficits calculated using the approach companies have to adopt for their corporate accounts. The data underlying the survey is refreshed as companies report their year-end accounts. Other measures are also relevant for trustees and employers considering their risk exposure.
Mercer DB policy group chair and partner Alan Baker says: “This is great news for both pension schemes and company 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 (IRM), it’s crucial to have contingency arrangements and plans in place.”
Mercer partner and strategy advisor Le Roy van Zyl says: “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, e.g. 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.”