Pension deficits unaffected by rise in equity markets

The rise in global equity markets in the third quarter of this year had no effect on the pension deficits of the companies in the FTSE 350. But the apparent stability belied dramatic swings in asset and liability values.

According to new Mercer data, the company pension deficits remained unchanged from the previous quarter. The consultancy’s research estimates that the aggregate pension deficit for FTSE 350 companies stood at £85bn (€95.3bn) at 30 September 2010. Mercer’s data also showed the Q2 deficit at £85bn.

However, Mercer said the appearance of stability was misleading. Asset and liability values have swung dramatically over Q3. The aggregate deficit moved by £45bn, hitting a high point of over £100bn in late August and a low of £57bn in July.

“Pension schemes are running to stand still in the face of such volatility,” said Deborah Cooper, head of Mercer’s retirement research group. “Overall, the fall in bond yields wiped the value of the equity market recovery off company balance sheets. Despite companies continuing to make significant contributions to their pension arrangements and improvements in trustees’ invested funds, the balance sheet effects at the end of the quarter were the same as at the start.”

According to Mercer, the events of the last quarter highlight that it is not enough for trustees and employers to simply monitor their pension scheme’s investment performance. Although asset values have increased significantly over the quarter, on an accounting basis, pension scheme funding levels have not improved. Trustees and employers also need to consider the impact that market changes have on the scheme’s liabilities and, in particular, the overall funding level, which can be even more volatile.