Low interest rates double FTSE350 DB pension deficits

Low interest rates double FTSE350 DB pension deficits

Low interest rates double FTSE 350 DB pension scheme deficits from £56 bn to £107 bn over 2014

  • 6 January 2015
  • United Kingdom, London

Mercer’s Pensions Risk Survey data shows that the accounting deficit of defined benefit (DB) pension schemes for the UK’s largest 350 companies increased over December and now exceeds £100bn. The figure represents a massive increase from the £56bn recorded at the end of 2013, as well as a substantial monthly increase. 

The deficit increased from £98bn as at 30 November 2014 to £107bn as at 31 December 2014. Consequently, funding levels reduced from 86% to 85% over the same period, with the deterioration being substantially driven by an increase in liabilities resulting from a further fall in corporate bond yields.  At 31 December 2014, asset values were £608bn, up £2bn from the £606 billion recorded in November. Liability values were £715bn, up £11bn from £704 billion in the previous month. At 31 December 2013, the corresponding deficit was £56bn, with asset values of £561bn and liability values of £617bn.

“The sharp fall in both corporate and government bond yields to historic lows during the second half of the year has resulted in a sharp rise in pension scheme deficits. The accounting deficit is 90% higher at the end of 2014 compared to the position at the end of 2013,” said Ali Tayyebi, Senior Partner in Mercer’s Retirement business.

“A huge variety of global financial and economic factors affected yields in 2014 and we anticipate continued volatility in 2015. Whilst the recent fall in yields may cause many pension schemes to review the hedging of their interest rates schemes should be open to the opportunities that volatility provides. Companies and trustees should be prepared,” added Mr. Tayyebi.   

Mercer highlights that market conditions are not preventing risk transfer activity. The consultancy points out that completed buy-in and buy-out insurance company transactions and longevity swaps amounted to £11 bn and £24bn of liabilities respectively in 2014, more than any other previous year. Other DB risk management tactics also thrive. According to Mercer, many other companies have completed or are undertaking a pension increase exchange exercise, with others reviewing member options in light of the pension flexibility due in April 2015. Most recently, Mercer was lead advisor on the multistage de-risking project with US-based TRW Automotive Inc. The transaction consisted of an enhanced transfer value offer to deferred members and a £2.5bn buy-out of the pensioner liability of the TRW Pension Scheme.

Adrian Hartshorn, Senior Partner in Mercer’s Financial Strategy Group and strategic corporate adviser on the TRW transaction, said, “With deficits remaining stubbornly high, some corporates are now choosing risk transfer exercises. The recent TRW transaction, the UK’s largest ever UK buy-out, demonstrates that combining the right investment strategy with liability management options in an innovative way still provides opportunities for liabilities to be settled cost efficiently. The impetus to review options available to members has also increased in light of the new defined contribution flexibility available from April. As a result, there is likely to be further evolution in the DB pensions market over the coming 12 months as companies seek opportunities for cost and risk mitigation.”

Mercer’s data relates to about 50% of all UK pension scheme liabilities and analyses pension deficits calculated using the approach companies have to adopt for their corporate accounts. The data underlying the survey is refreshed as companies report their year-end accounts. Other measures are also relevant for trustees and employers considering their risk exposure. But data published by the Pensions Regulator and elsewhere tells a similar story.

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Notes for editors
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 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 2013 was £561 billion, compared with estimated aggregate liabilities of £617 billion. Allowing for changes in financial markets through to the end of December 2014, changes to the FTSE350 constituents, and newly released financial disclosures, the estimated aggregate assets were £608 billion, compared with the estimated value of the aggregate liabilities of £715 billion.

About Mercer
Mercer is a global leader in talent, health, retirement, and investments. Mercer helps clients around the world advance the health, wealth, and performance of their most vital asset – their people. Mercer’s more than 20,000 employees are based in 42 countries and the firm operates in more than 130 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy, and human capital. With over 55,000 employees worldwide and annual revenue exceeding $12 billion, Marsh & McLennan Companies is also the parent company of Marsh, a global leader in insurance broking and risk management; Guy Carpenter, a global leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a global leader in management consulting. For more information, visit www.mercer.com. Follow Mercer on Twitter @MercerInsights. In the UK, Mercer Limited is authorized and regulated by the Financial Conduct Authority.