UK - Growing long-term inflation expectations have offset the effects of equity market gains, causing the aggregated pension deficit of FTSE350 companies to be valued at £160bn (€187bn) at the end of March 2010.

Latest figures from Mercer's quarterly Pensions Update showed that the deficits were down slightly on the £170bn valuations at the end of 2009, but were three times as high as they were 12 months  prior, when they were valued at £49bn.

Dr Deborah Cooper, head of Mercer's retirement resource group, said a lot of attention had been paid to the recent rebound in equity markets, with the FTSE All-Share Index increasing by 50% in the 12 months to March 2010. But "the picture is more complex for companies with defined benefit (DB) pension schemes", she added, particuarly given inflation data.

She warned: "The effects of falling corporate bond yields, due to increased market confidence relative to the position last year and higher inflationary expectations, will result in many companies' balance sheets remaining exposed to significant pension scheme deficits, despite increasing asset values."

Latest inflation figures published last week showed that UK Consumer Price Inflation (CPI) increased to a 17-month high of 3.7% in April, up from 3.4% the previous month. Meanwhile, Retail Price Inflation reached 5.3% in April, its highest level since July 1991, while core annual inflation that excludes energy, food and alcoholic beverages increased to 3.1%.

Mercer said DB plan sponsors were beginning to realise the "continued mis-match" between the scheme's assets and its inflation-linked liabilities. The consultancy aruged that this was triggering an evaluation of the longer-term strategic direction of DB schemes' funding strategies to consider "more seriously the options for reducing balance sheet volatility".

Cooper added that de-risking strategies, such as reducing equity exposure or implementing buyouts, leave companies with the dilemma of reducing volatility at the expense of potentially higher returns and the possibility of higher employer contribution payments.

But she said there were solutions - including those offered by Mercer - whereby risk could be mitigated without reducing opportunities for highly positive market performance.

"Events in the wider economy over the past couple of years have highlighted the need to not only be prepared for the worst, but to also have an effective strategy in place to capitalise from positive market movements when things start to recover," she added.