FTSE350 pension schemes funding levels hit 2012 high after deficits reduce by 33% in September, says Mercer.

Mercer's Pensions Risk Survey data shows that the accounting deficit of defined benefit (DB) pension schemes in the UK reduced significantly over the month of September.

According to Mercer's latest data, the estimated aggregate IAS19 deficit for the DB schemes of FTSE350 companies stood at £42bn (equivalent to a funding ratio of 92%) at 30 September 2012. This compares to a deficit figure of £63bn at the end of August (funding ratio of 89%) and a figure of £61bn at the end of December 2011 (funding ratio of 89%), on a like-for-like basis.

Over the month, the yield on high quality corporate bonds increased and the market implied long-term inflation reduced (market implied inflation is measured using the difference between fixed and index linked gilt yields). The combined effect was a reduction in liabilities of more than 3% over the month to £557bn at 30 September 2012. Asset values also increased marginally from £513bn as at 31 August 2012 to £515bn as at 30 September 2012 to further reduce the deficit.

"This is good news for companies sponsoring DB pension schemes as we near the year-end reporting period," said Ali Tayyebi, Mercer's head of DB risk in the UK.

"The two key factors which drive the calculation of liabilities have both moved in a favourable direction. The yield on corporate bonds increased marginally, albeit still remaining low compared to historic standards. The outlook for long-term RPI inflation has also reduced. The latter coincides with the Office of National Statistics announcement of a consultation regarding the future calculation of the RPI, one of the outcomes of which might be to reduce the expected rate of RPI increases.

Tayyebi said it is far too early to speculate whether the reduction in the outlook for RPI is due to the announced consultation or the many other factors in the UK and global economy which impact on this. "September has been the stand out positive month this year so far, but experience shows that the factors causing the improvement could reverse just as easily. Many pension scheme trustees and their sponsoring employers are all too aware of this. Those who have trigger mechanisms in place for de-risking actions may well have moved closer to some of those triggers over the month and some "locking-in" of improved conditions may be taking place."

Mercer's data relates only to about 50% 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. Mercer says that data published by the Pensions Regulator and elsewhere tells a similar story.

First published 03.10.2012
azeevalkink@wilmington.co.uk