EUROPE - Falling corporate bond yields are wreaking havoc on the balance sheets of companies with defined benefit (DB) schemes, Mercer has said.

The consultancy said this trend, combined with equity market performance so far this year, was likely to result in larger deficits for companies in much of the developed world.

According to Mercer research, companies with significant DB occupational pension schemes that prepared financial statements under current market conditions would still report larger deficits than those 12 months ago.

Mercer said the drop in corporate bond yields, which have an impact on the value placed on pension scheme liabilities for accounting purposes, had been the chief culprit, adding that yields had fallen by more than a quarter in some markets.

Frank Oldham, global head of Pension Risk Consulting, said: "A 50-basis-point fall in discount rates roughly results in a 10% increase in liabilities for a pension scheme.

"As a result, measures of pension scheme liabilities have increased faster than the value of the assets held across numerous markets. The result is even larger deficits on company balance sheets."

Regional differences will affect the liabilities recorded, he added.

In the UK, for example, benefits are inflation linked, so liabilities have been more stable even though they sit at historically high levels.

In Germany, accounting rules differ from those in most other countries in that they allow companies to average bond yields over seven years, so the impact can appear "more muted".
And in the Netherlands, pension accounting liabilities are based on AA corporate bond yields drawn from the wider European Monetary Union market, where there has been a "significant fall", Mercer said.