Inflation expectations push up DB pension liabilities

AN INCREASE in long-term inflation expectations has driven up FTSE 350 defined benefit liabilities by about 3%, according to outsourcing business Mercer.

The Mercer Pensions Risk Survey showed liabilities rising to £575bn in October from £560bn a month earlier. Assets also rose marginally by £2bn to £520bn, Accountancy Age's sister publication Professional Pensions reports.

This left IAS19 deficits at £55bn in October from £42bn in September, an increase of 31%.

Mercer said October's results reversed many of the gains made in September, and funding levels are now back to mid-year levels.

Head of DB risk at Mercer Ali Tayyebi said: "The outlook for long-term RPI inflation has increased again after the sharp decline during September, following the Office for National Statistics announcement of a consultation regarding the future calculation methodology for the RPI.

"It remains to be seen how much of the ultimate change the market is currently factoring into its outlook."

However, a review of the Retail Price Index presents a range of outcomes and potential opportunities, explains Mercer partner Adrian Hartshorn.

"If changes to RPI result in it being reduced close to the CPI calculation then this could lead to sharp adjustments – affecting both pension scheme assets and liabilities to differing degrees," he said.

"For many, but not all, this may have a materially favourable impact on the funding position of their schemes."

The survey comes after research from Mercer and the ICAEW showed scheme deficits were hampering companies' investments (PP Online, 5 November).