UK - Intervention by six of the world’s largest central banks was unable to halt an increase in pension fund deficits in the UK’s 350 largest companies, according to Mercer.
The consultancy estimated last week’s announcement that central banks, including the US Federal Reserve and the European Central Bank, would offer cheaper dollar funding to financial institutions helped undo some of the equity declines seen since the end of October.
But it said that funding ratios across the FTSE 350 companies only rose by 3 percentage points to 86% in November, still down from 89% at the end of the previous month.
Mercer’s pension risk group leader Ali Tayyebi also said the “relentless” fall in gilt yields - triggered by the ongoing euro-zone debt crisis and the Bank of England’s quantitative easing (QE) measures - would lead to the deficit figures increasing in year-end company reports.
“We are beginning to see the bad economic news catch up on the accounting numbers, which had so far been relatively protected in the midst of the general economic turmoil,” he said, adding that QE measures were now depressing not only gilt yields but those of corporate bonds.
His colleague Deborah Cooper, head of Mercer’s retirement research group, meanwhile warned that gilt yields were making it harder for trustees and sponsors to agree on deficit reduction payments.
She said that, until liquidity problems in euro-zone countries such as Greece and Italy were resolved, it was “premature” to demand more deficit funding.
“A pause for thought is needed,” she said. “We counsel caution at the moment, especially when every decision places more pressures on employers who are already suffering under the financial strain of the UK’s austerity measures.”
Cooper warned that negotiating higher contributions as a deficit reduction measure could contribute to a reduction in prosperity in the UK if done before the crisis was resolved.
“Balancing the interests of trustees and scheme members with those of employees and shareholders is already a difficult call to make, and, in current market conditions, it is particularly difficult to determine an equitable outcome,” she added.
She called on the Pensions Regulator to issue guidance for trustees, stating that short-term easements for funding were possible “until a more stable position” had been reached.
“If it transpires that there has been a relatively permanent shift in local and international markets, resulting in low gilt yields becoming the norm then, where appropriate, trustees must leave themselves the right to re-open negotiations with the employer to target the higher funding level they require,” Cooper said.