FTSE350 deficits rise by £6bn over October despite asset boost

FTSE350 COMPANIES‘ defined benefit (DB) scheme deficits increased by £6bn over October to hit £102bn on an IAS19 basis, despite rising asset values, according to consultancy Mercer.

The £13bn boost to asset values to £566bn was not enough to counter the impact on deficits caused by falling bond yields, the consultancy said, Accountancy Age’s sister publication Professional Pensions reports.

Mercer head of DB risk Ali Tayyebi (pictured) said: “It will come as a surprise to many that despite the visibly strong asset returns over the month, deficits have still increased compared to the position at the end of September.

“The increase in UK equity values by over 4% helped overall asset values increase by £13bn over the month. However a further narrowing of credit spreads has resulted in an increase in the value places on IAS19 accounting liabilities.

“For companies that have 31 December year-ends, the stubbornly high accounting deficits will have a detrimental impact on earnings for 2014.”

Tayyebi added that a divergence is growing between the deficits measured on an IAS19 basis and the technical provisions basis, which trustees and sponsors use to determine contributions.

“The latter are typically driven by yields on government bonds and have generally improved since the end of Q1 of this year,” he said.

“In contrast, accounting deficits have increased principally due to a reduction in credit spreads. The improvement in funding deficits is likely to lead to dialogues between trustees and corporate sponsors on how the improved position can be used to benefit both parties, with options being; reduced employer contributions, shorter recovery periods and/or some accelerated de-risking.”

Mercer Financial Strategy Group senior partner Adrian Hartshorn added: “With improving funding levels on the trustee funding measure there is an increased focus on locking in some of the gains. Implementation of risk reduction strategies requires careful thought and planning in a market where there is divergence in return prospects for different asset classes.”