United Kingdom
London, 3 January 2012

• Pension scheme accounting deficits were £84bn at 31 December 2011 compared to £64bn at 31 December 2010
• This represents a 3% fall in the funding levels over the year from 88% to 85%
• Funding levels have also deteriorated over the month, despite an increase in asset values

Mercer’s Pensions Risk Survey data shows that the accounting deficit of defined benefit (DB) pension schemes in the UK has increased for the second consecutive month. According to Mercer’s latest data, the aggregate FTSE350 IAS19 defined benefit pension deficit  stood at £84bn (equivalent to a funding ratio of 85%) at 31 December 2011, compared to £80bn (funding ratio of 86%) at 30 November 2011. The funding ratio at 31 December 2010 was 88% corresponding to an aggregate deficit of £64bn.

Corporate bond yields, which are used to discount liabilities, fell again over the month increasing liability values. The effect of this was partly offset by a small reduction in long-term inflation expectations. The net effect was to increase liability values by approximately 2% over the month to £562bn as at 31 December 2011. Over the same period, asset values increased from £473bn to £478bn.  

“At the start of 2011 the yield on Sterling AA rated corporate bonds was nearly 1% per annum higher than the corresponding Eurobonds, whereas at the year-end the yields were virtually identical.  As the European sovereign debt crisis intensified in the autumn, UK government bonds became a relative safe haven.  It looks like this back-handed compliment has now extended to UK corporates as well over the last couple of months. The flip side of this is that it has increased the notional cost of the debt owed to their own DB pension schemes and means that 2011 ends on a bleak note despite asset values showing an increase over the year, and long term inflation expectations being much lower now than they were at the start of the year," said Ali Tayyebi, Senior Partner and Pension Risk Group Leader. 

Adrian Hartshorn, Partner in Mercer’s Financial Strategy Group added, “2011 was a defining year with a clear bifurcation taking place amongst schemes. Companies and trustees that have taken action to hedge liability risks have seen their deficits hold steady or increase only moderately. However, companies or trustees who have not hedged liability risks have been more adversely affected. Looking forward into 2012, managing liability risk will continue to be an important focus for many organisations and we expect to see the implementation of both traditional and non-traditional risk management strategies including interest rate and inflation hedging, longevity hedging, liability management exercises or the use of non-cash funding options to smooth cash contribution requirements.” 

Notes for editors
Please contact the Press Office for graphs and charts.

Mercer estimates the aggregate combined funded ratio of plans operated by FTSE350 companies on a monthly basis. This is based on projections of their reported financial statements adjusted from each company’s financial year end to 31 December in line with financial indices. This includes UK domestic funded and unfunded plans and all non-domestic plans. The estimated aggregate value of pension plan assets of the FTSE350 companies at 31 December 2010 was £463 billion, compared with estimated aggregate liabilities of £527 billion. Allowing for changes in financial markets through to the end of December 2011, changes to the FTSE350 constituents, and newly released financial disclosures, the estimated aggregate assets were £478 billion, compared with the estimated value of the aggregate liabilities of £562 billion.