FTSE350 pension funding deficits increase

Mercer, FTSE350, pensions deficit survey, pensions, Deborah Cooper


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FTSE350 pension funding deficits increase despite equity market revival

UK
London, 2 October 2009

FTSE350 aggregate pension deficit increases to £140 billion despite equity market rally, corresponding to an aggregate funding level of 77 percent
Deficit increase is due to credit spreads starting to fall back from record highs towards more normal levels
If credit spreads revert fully to historical levels, without further market recovery, this could increase deficits by a further £60 billion

FTSE 350 pension scheme funding deficits on a company accounting basis continue to increase despite the equity market revival, as credit spreads start to fall back from recent record highs. The FTSE 350 aggregate pension scheme deficit at 30 September 2009 was estimated at £140 billion, corresponding to an overall funding level of 77 percent.

The data is produced by Mercer as part of its quarterly Pension Update which analyses the aggregate pension commitments for FTSE 350 companies.

Pension liabilities in company accounts are calculated by reference to corporate bond yields. When the current financial turmoil became apparent, AA corporate bond spreads increased from levels of under 1 percent in early 2007 to record levels of almost 3 percent early in 2009 as investors demanded higher returns to compensate for illiquidity and the greater risk of corporate defaults. This had the effect of reducing disclosed pension liabilities in companies’ books. Now that fears of widespread corporate defaults seem to be receding amid the first green shoots of a potential recovery, AA corporate bond spreads have fallen back to under 1.5 percent. The resulting increase in pension liabilities has more than offset the benefit of the 20 percent increase in global equity markets over the last quarter.

“It was always one of the more perverse side-effects of the credit crunch that pension deficits in company accounts appeared to reduce,” said Dr Deborah Cooper, head of the retirement resource group at Mercer. “While it is obviously not good news that disclosed deficits are again on the increase, at least this will bring the deficits shown in company accounts back more into line with pension fund trustees’ own assessments. This should facilitate more constructive debate and co-operation between companies and trustees regarding pensions, rather than the differences in calculation methods muddying the waters and diverting attention from the true scale of the problems that need to be tackled,” she said.

Mercer research also highlights that even if the recent rally in equity markets is sustained, a continued correction of corporate bond spreads to pre-credit crunch levels could add a further £60 billion to pension deficits.

“With the benefit of hindsight, many companies and trustees will be kicking themselves for having missed the opportunity back in 2006 or 2007 to bank the gains in funding levels that they enjoyed,” commented Dr Cooper. “While we are in a bad place right now with few signs of an improvement in the short-term, a recovery must surely come sooner or later. Now is the time to recognise the mistakes of the past and put strategies in place to lock in improvements as they arise in future, rather than risk missing the boat again.”

Notes for Editors
The data is accurate as at 30 September 2009.