U.K. pensions reached their highest funding level in 2012 after a surge in corporate bond yields and a reduced outlook for market-implied price inflation in September, according to the latest data from Mercer.
The 92% funding level, which is the ratio of assets over liabilities, represents a 33% improvement in September compared to August; the estimated deficit was 42 billion in September compared to 63 billion in August.
Mercer says the yield on high-quality corporate bonds increased in September while the difference between fixed and index-linked gilt (government bond) yields improved, which means a reduction in market-implied long-term inflation.
This is good news for companies sponsoring DB [defined benefit] pension schemes as we near the year-end reporting period, says Ali Tayyebi, head of DB risk in the U.K.
Tayyebi says the marginal increase in corporate bond yields and the improved outlook on inflation are the two key indicators driving the calculation of liabilities.
September has been the standout positive month this year so far, but experience shows that the factors causing the improvement could reverse just as easily, says Tayyebi. Many pension scheme trustees and their sponsoring employers are all too aware of this. Those who have trigger mechanisms in place for de-risking actions may well have moved closer to some of those triggers over the month and some locking-in of improved conditions may be taking place.
(CG)