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Funding levels of UK pension schemes suffered a major setback over the month of August as assets fell and liabilities increased. According to Mercer’s latest data, the estimated aggregate IAS19 deficit for the defined benefit schemes of FTSE350 companies stood at £98bn (equivalent to a funding ratio of 85%) at 31 August 2013. This compares to a deficit figure of £85bn at the end of July 2013 (funding ratio of 87%).

During August asset values reduced by £9bn from £557bn at 31 July 2013 to £548bn at 31 August 2013. Over the same period liability values increased by £4bn from £642bn at 31 July 2013 to £646bn at 31 August 2013.

“During August, the FTSE 100 index lost most of the gains it had made during July.  This contributed to a reduction in pension scheme asset values over the month.  At the same time liability values increased due to an increase in long-term inflation expectations although this was partially offset by a small increase in corporate bond yields. ” said Ali Tayyebi, head of DB Risk in the UK. “This emphasises the number of moving parts which affects the calculation of UK pension scheme deficits.  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.  Pension schemes which 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.” added Mr Tayyebi.

Mixed picture

“Although accounting deficits have increased since the start of the year the same is not necessarily true for funding deficits, the measure used to determine the amount of cash contributions that sponsors make to pension schemes, or for solvency deficits, the measure used to determine the cost of buying an insurance policy to fully settle the liabilities. Sponsors and trustees need to monitor the financial performance of their scheme using a number of different measures and be prepared to act accordingly. With careful planning and monitoring this can allow significant decisions to be taken without undue delay. For example, Mercer acted as lead adviser on the record £1.5bn buyout of the EMI Group Pension Fund which completed in July, and on the £440m buyout of the InterContinental Hotels UK Pension Plan, completed during August. Careful planning allowed both of these deals to proceed in favourable market conditions. ”, said Adrian Hartshorn, a senior partner in Mercer’s Financial Strategy Group.

Mercer’s data relates only 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. Other measures are also relevant for trustees and employers considering their risk exposure. But data published by the Pensions Regulator and elsewhere tells a similar story.

Expats Pensions Comments:

There is an increasing trend relating to UK company pension scheme deficits. Over the long term, as the funds being paid into the scheme are less than the pension’s being paid out, there is a question mark over how many years this can sustain. Eventually a scheme may have to apply for government protection if they can not meet their obligations; which may ultimately result in your individual pension becoming significantly lower than what you were advised.

Form many clients living overseas this concern leads to them explore moving their pension back into their own control. Being able to choose where your pension is invested, in what currency and what charges are being taken from the fund is very important.

We specialise in helping clients evaluate the possibility of transferring their personal or company pension with them overseas. Please see our site for more information www.expatspensions.com