Pension funding wiped out by increase in liabilities

AN INCREASE in liabilities across UK pension schemes in March wiped out improvements in funding levels reported over the last quarter, according to research from JLT Pension Capital Strategies.

The consultant’s latest update on funding for defined benefit schemes levels found the aggregate deficit across all schemes in the UK private sector stood at £143bn on an IAS19 basis at the end of March, Accountancy Age’s sister publication Professional Pensions reports. 

This is an increase on the £117bn aggregate deficit reported at the end of February and resulted in a drop in funding ratios from 91% to 89%.

The average funding level of schemes at FTSE100 companies dropped from 88% to 86% while for FTSE350 schemes it fell from 89% to 86% over the month.

The funding level falls of March bring schemes back to where they were 12 months ago after a volatile year. The average funding ratio across all schemes is up slightly from 88% last March while at blue chip companies it is unchanged.

This is despite companies pumping a record £41bn into DB schemes over the last year according to the Office for National Statistics (PP Online, 25 March).

JLT PCS managing director Charles Cowling (pictured) said he expected continuing low yields on UK bonds to keep scheme liabilities high, but that improved asset returns in future could help improve funding levels.

He said: “Last month’ Budget included an order to the Bank of England to consider using unconventional monetary tools to boost the economy. This is expected to keep bond rates low and so maintain high pension liabilities. However if the economy is boosted then equity asset values should increase and thus help to reduce pension scheme deficits.

“The Cyprus crisis is also acting to keep bond rates low. Prior to this crisis the Eurozone looked as though it was stabilising, and so UK bond rates were starting to rise, but this Cypriot effect could make UK bonds comparatively that bit more attractive.”

To learn more about DB funding levels, register for the Pensions and Benefits show 2013.

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