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Deficits of defined pension schemes fall, while funds rise

Defined benefit pension schemes “appear to be in better health compared to 10 years ago”, with a drop in deficits and an increase in funds, according to figures from consultancy firm Mercer.

Mercer's Pensions Risk Survey consultancy report revealed a downward trend in the deficit figure for defined benefit (DB) pension schemes of FTSE350 companies.

At the end of September DB scheme deficits made a significant drop to £42 billion, from a figure of £63 billion at the end of August. As well as a month on month drop, this figure was lower than the £61 billion recorded at the end of December 2011.

Average scheme funding levels have also inched up over the last decade, rising from 79% in 2002 to 89% in 2012.

Despite these positive figures, liabilities continue to outweigh the value of assets, demonstrating the volatile nature of the market. In 2002, the value of liabilities in the FTSE350 stood at £357 billion while assets stood at £282 billion. By 2012, these figures were £574 billion and £501 billion respectively.

Commenting on some of the reasons behind the continued gulf between assets and liabilities Adrian Hartshorn, a partner in Mercer’s Financial Strategy Group, said:

“The analysis illustrates the impact of the sustained fall in bond yields, equity underperformance and improving longevity over the last 10 years. Even removing the impact of price inflation, 2012 liability values are much higher than they were in 2002, which can be accounted for by the falling bond yields and improving longevity.

“Whilst defined benefit schemes appear to be in better health compared to 10 years ago because the funding level is higher, big deficits remain despite very large company contributions over the period.”

 Hartshorn went on to say that DB schemes need to do more to create de-risking strategies to ensure a better outcome over the next decade.

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