The deficit of the UK’s 350 largest listed companies’ defined benefit (DB) pension plans decreased 9% to £76 billion ($103.1 billion) at the end of 2017, from £84 billion at the end of 2016, consulting firm Mercer reported.
According to Mercer’s 2017 Pensions Risk Survey, the asset value of the pension plans of the 350 largest publicly traded companies rose £44 billion to £781 billion from the £737 billion reported at the end of December 2016. During that same period, the liabilities of those pensions increased £36 billion to £857 billion from £821 billion
Mercer’s research also estimates that the improved financial position of FTSE 350 pension plans may directly lead to increased profits of around £400 million in 2018.
“This is money which can be invested to stimulate growth and drive the British economy, or can be returned directly to investors,” said Alan Baker, chair of the defined benefit policy group at Mercer, in a release. “The pension deficit decrease is a welcome reversal of the trend in recent years that saw the deficit more than double in 2016 alone. Trustees who run schemes, however, need to continue to be prudent and ask themselves how much risk they need to take to meet their funding requirements.”
Mercer estimates the aggregate combined funded ratio of plans operated by FTSE350 companies on a monthly basis. The information is based on projections of the reported financial statements adjusted from each company’s financial year end in line with financial indices. This includes UK domestic funded and unfunded plans, as well as all non-domestic plans.
Despite the reduction on pension deficits, Mercer cautions that the level of risk being taken are still significant, and that the positive outcome for 2017 was very closely linked to stock market performance.
“As we move into 2018, it’s important for individual schemes to consider how prepared they are for any market shock,” said Andrew Ward, Mercer’s head of risk transfer consulting. “With Brexit-related uncertainty, trustees need to consider the potential impact on their sponsor’s financial security. Against this backdrop, we expect schemes to reduce risk and consolidate gains.”
Ward added that the pace of risk management activity in 2017 is likely to accelerate, “and we expect 2018 to be the biggest year ever for pension risk transfer.”
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.