The FTSE 350 pension scheme accounting deficits increased by over £25bn over 2013, despite higher contributions from employers and strong UK stock market returns.
According to Mercer's Pensions Risk Survey data, the estimated aggregate IAS19 deficit for FTSE 350 defined benefit (DB) schemes stood at £97bn, which equates to a funding ratio of 85%, at 31 December 2013.
The deficits increased despite the fact that UK equities returned 19% over the year and there were continued "significant" cash contributions from employers, Mercer said.
The firm said that there was an improvement in the position over December 2013, with the deficit reducing from £102 at 30 November.
Mercer said that the increase in deficits is predominantly driven by the increase in long-term inflation expectations over the year.
"Over 2013 as a whole it has been interesting to see how the three key elements which drive the deficit calculation have independently influenced the deficit," Mercer head of DB risk in the UK Ali Tayyebi said.
He said that deficits increased sharply up to the end of April driven largely by increases in the market's outlook for long-term market implied retail prices index (RPI) inflation, driven partly by the announcement from the Office for National Statistics (ONS) confirming that the RPI calculation would not be changed.
He added that the position had recovered by mid-year as corporate bond yields increased sharply over Q2 reducing the value placed on pension scheme liabilities.
"However, a further increase in long-term market-implied inflation and a reversal of some of the increase in corporate bond yields increased deficits by £20bn over the second half of the year despite the UK stock market returning 10% over that period," Tayyebi said.
Adrian Hartshorn, senior partner in Mercer's financial strategy group, said that even as accounting deficits have increased, evidence suggests there is a reduction in funding deficits and solvency deficits.
He said that there has been an increase in activity to manage and settle liabilities as a result of improved funding and solvency deficits, and that 2013 saw a return to higher volumes of buyout deals and a record volume of longevity transactions completed.
Hartshorn said: "Looking forward into 2014, there are likely to be further transactions. These will likely involve a further transfer of risk to the insurance market through more buy out and longevity transactions.
"However, there are also likely to be other transactions and exercises implemented by scheme sponsors, such as options that allow pensioners and deferred pensioner additional flexibility in the way they draw their benefits."
First published 07.01.2014
monique_simpson@wilmington.co.uk
