Defined benefit (DB) deficits of FTSE350 companies remained unchanged during September, but only after reaching an intra-month low of £78bn and a funding level of 89%, Mercer has revealed.
According to Mercer's pensions risk survey, the total IAS19 deficit for the DB schemes of FTSE350 companies stood at £98bn at 30 September 2013, which is equivalent to a funding ratio of 85%.
Asset values increased by £4bn over the month from £548bn at 31 August 2013 to £552bn at 30 September this year, but liability values also increased by £4bn from £646bn to £650bn over the same period.
Ali Tayyebi, Mercer head of DB risk in the UK, said: "On the surface, it appears that September was a picture of calm with the FTSE100, long-term corporate bond yields and the market's view of long-term inflation expectations all broadly unchanged from 31 August to 30 September.
"However this hides the fact that a combination of rises in the stock market and rises in long-term bond yields had reduced the deficit to around £78bn on 11 September."
Tayyebi added that more schemes are now monitoring their funding positions regularly and that the improvement in funding levels may have triggered some changes in asset allocation to lock in some of the positive performance.
However, he said that many schemes are still not able to act quickly enough.
The primary focus for scheme sponsors and trustees is the ability to finance and pay future benefits, especially in light of an increasing number of DB schemes being closed to new entrants and future accrual, Adrian Hartshorn, senior partner in Mercer's financial strategy group said.
He said: "The ability of trustees to do this depends both on the contribution income from the scheme sponsor and the investment income from the scheme assets. Despite significant contributions and financial support from many scheme sponsors funding levels remain stubbornly low driven primarily by low gilt yields.
"However by actively considering a wider range of asset classes, relying less on low yielding gilts and taking advantage of temporary changes in market conditions, as were observed this month, trustees and scheme sponsors are able to materially improve funding levels."
First published 04.10.2013
monique_simpson@wilmington.co.uk
