The accounting deficits of DB pension plans in the United Kingdom increased over the month of August.
The estimated aggregate shortfalls for the DB plans of the 350 largest companies on the London Stock Exchange amounted to £98 billion (C$159 billion) at the end of August, according to Mercer’s Pensions Risk Survey. This is equivalent to a funding ratio of 85%.
At the end of July, the deficit was smaller, £85 billion, translating into a funding ratio of 87%.
During August, the asset values of DB plans declined by £9 billion—from £557 billion at the end of July to £548 billion at the end of August. Part of the reason is that in August, the FTSE 100 Index lost most of the gains it had made in July, says Ali Tayyebi, Mercer’s U.K. head of DB risk.
Over the same period, liabilities ballooned by £4 billion—from £642 billion at the end of July to £646 billion at the end of August. The reason was an increase in long-term inflation expectations—although this was partially offset by a small rise in corporate bond yields, Tayyebi explains.
“With so many domestic and global economic factors affecting the outlook for equity values, corporate bond yields and inflation, such variations in the funding level on a month-by-month basis are not surprising,” Tayyebi says. “Pension [plans] that have already concluded that this is not desirable and, for example, have already hedged their inflation risk to a significant extent will have fared relatively better over the month.”
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