Despite extreme market volatility over the second half of 2007, FTSE350 pension schemes remain relatively well-funded with an aggregate funding level of 97% and corresponding deficit of 13 billion. This represents a reduction of 37 billion from the corresponding figure of 50 billion at 31 Dec, according to Mercer’s Quarterly FTSE350 Pensions Deficit Survey.
The survey also showed that the current FTSE100 funding level is 98%, with a corresponding aggregate deficit of 9 billion. According to the report, the funding situation has primarily been driven by a decrease in liabilities caused by increasing bond yields while the inclusion of seven new entrants to the FTSE100 has also had an impact.
“Given the high levels of volatility witnessed in the markets in the second half of 2007, it is encouraging to see that FTSE350 pension schemes remain well funded on aggregate – especially when compared to the equivalent position at the end of 2006,” says John Hawkins, principal at Mercer. “Despite this strong year-end position, it is little surprise that many schemes and their sponsors continue to seek ways to mitigate pension risks, especially those that are poorly rewarded.”
Mercer believes that it is this demand for de-risking solutions, coupled with the emergence of a number of innovative products in the capital markets, which is driving the development of the alternative buyouts market.
“Given the rapid rate of development in the traditional and alternative buyout markets, it will be interesting to see how much business is written by some of the new players in 2008,” Hawkins continues. “There is still little evidence of the robustness of the security offered by a number of the new solutions and, as with most things in life, schemes and sponsors should consider carefully what they are getting for their money when de-risking or buying out. The Pensions Regulator is clearly keeping an eye on developments in the market place.”
In its report, Mercer comments that the developments in the risk reduction and alternative buyout markets continue to place downward pressure on the cost of buying out with traditional insurers. Over the year there has been a significant reduction in the premium charged by insurers to take on full responsibility for member benefits and they have also demonstrated significant flexibility in structuring deals. Despite this downward pressure on the cost of insured buyouts, Mercer estimates that at the end of 2007 the shortfall on this basis was still 122 billion for FTSE350 companies. Although this figure marks a considerable improvement over the 250 billion seen at the end of 2006, an insured buyout is still well beyond the reach of most pension schemes.