FTSE350 Pension Deficits Fall 32% in May

Liabilities decline, assets rise to help shrink gap by £16 billion.

The UK’s FTSE350 pension gap continued to shrink, falling £16 billion ($21.4 billion) in May to £34 billion, according to consulting firm Mercer.

Mercer attributed the decline in accounting deficits of the UK’s 350 largest listed companies to rising asset prices combined with a slight drop in liabilities. Asset valuations increased £15 billion to £791 billion, while liabilities fell £1 billion to £825 billion, due to a fall in the expectation of inflation offset by lower corporate bond yields.

“This is great news for both pension schemes and company sponsors with yet another reduction in the pension gap, but we must not be complacent,” Alan Baker, chair of Mercer’s defined benefit policy group, said in a release. “Market swings could dramatically reverse these improvements and have done so in the past.”

Baker also said it’s important pension trustees and sponsors understand the risks they’re exposed to, and have the right strategies in place to lock in the recent gains. “It’s crucial to have contingency arrangements and plans in place.”

Mercer’s data relates to about 50% of all UK pension liabilities, and analyzes pension deficits using the approach companies have to adopt for their corporate accounts. The firm estimates the aggregate combined funded ratio of plans operated by FTSE350 companies 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 the end of 2017 was £785 billion, while estimated aggregate liabilities were £857 billion. Allowing for changes in financial markets through May 31, changes to the FTSE350 constituents, and newly released financial disclosures, the estimated aggregate assets were £791 billion, compared with the estimated value of the aggregate liabilities of £825 billion.

“While this is more welcome news, recent market volatility sparked by the political situation in Italy serves as a timely reminder of the speed at which things can change,” said Le Roy van Zyl, a partner and strategy advisor at Mercer. “We increasingly see schemes having an action-focused risk and cost management plan. Such a plan will be clear on the conditions under which specific activities will be warranted, e.g., member options, insurance market solutions, and cashflow-matching asset strategies. Increased market uncertainty, as we are seeing at the moment, then feeds into this plan and consequently the sequence of activities.”