The deficit of the UK's biggest defined benefit (DB) pension schemes increased by £13bn in January despite a 6.5% rise in the UK stock market, according to data collected by Mercer.

The estimated IAS19 deficit for the FTSE350 DB schemes was £75bn, the equivalent to a funding ratio of 88%, at 31 January 2013, compared to a deficit figure of £62bn at the end of December 2012.

Mercer's Pensions Risk Survey also showed that pension scheme liabilities rose over the month from £588bn to £610bn, while assets increased from £526bn to £535bn.

Immediately after the Office for National Statistics (ONS) announced that the retail prices index would remain unchanged, Mercer reported that pension deficits were estimated to have increased by £20bn, reflecting an increase in the market's view of long-term inflation, said Ali Tayyebi, Mercer's head of DB risk in the UK.

He added that increases in equity values and in corporate bond yields have only served to partially offset the increase in the deficit.

"This will be frustrating for many as the strong rise in equity values by itself may have raised thoughts about 'locking-in' some of those gains if it were not for the fact that this has not come through in overall improvements in the funding position," said Tayyebi.

Adrian Hartshorn, partner in Mercer's Financial Strategy Group, said that given the uncertainty from the ONS consultation, a number of its clients implemented an inflation only hedge in the fourth quarter of 2012, allowing them to lock into what now appears to be attractive rates of inflation.

He added: "Any risk management action does however need to reflect the scheme and company specific circumstances, so it would be wrong to suggest any particular hedging option was correct for all schemes; a scheme specific analysis and framework is needed to support active decision making.

"Any framework could for example be based around firstly understanding the overall risk and the different components of risk, understanding whether the risks can be tolerated or are required and then taking actions to either efficiently manage the risk or to mitigate the risk."

First published 07.02.2013

monique_simpson@wilmington.co.uk