We are delighted to launch our Pension Deficit Index. It tracks the overall accounting position of the UK’s FTSE 100 and FTSE 350 companies using our Asset Liability Suite software. Results are updated daily and we’ll be posting blog commentary regularly.
As we are launching our Index at the beginning of the New Year, we’ll take a look back over 2017 as well as look ahead to what may be in store in 2018.
2017 ended with the Pension Deficit Index showing a deficit of £95.6bn for the FTSE 100 and £119.6bn for the FTSE 350. Compared with the start of 2017 these deficits are lower by £11.9bn for the FTSE 100 and by £7.6bn for the FTSE 350. Across the FTSE 100 and FTSE 350 each taken as a whole, 2017 was a year where pension scheme assets increased in value at a faster rate than liabilities. Overall assets rose by around 5.5% while the rate at which liabilities increased was a couple of percentage points lower. That’s not altogether surprising. Returns on long-dated AA-rated sterling corporate bonds are a key driver for changes in liabilities – over 2017 that return was less than 5%. By comparison global equities returned around 14% in sterling terms over the same period. All in all, it was a much calmer year than 2016 which saw a large increase in pension accounting deficits in the wake of the result of the EU referendum.
Looking ahead to 2018, we see a couple of potential assumptions changes that will help to reduce reported defined benefit obligations and therefore narrow reported deficits.
Firstly we have the latest annual mortality projections produced by the UK actuarial profession. In recent years these have been successively reducing the allowance for future improvements in life expectancy, reflecting the slowdown in actual changes in life expectancy that we have been seeing in the UK. The most recent projection at the time of writing, CMI 2016, was published in 2017 so was not available for companies reporting with a 31 December 2016 year-end. It will however be available for 31 December 2017 year-ends and we expect many companies will choose to use it as part of their actuarial assumptions. Companies with a March or April year-end are expected to have the CMI 2017 projection available, which is expected to show a further reduction in projected life expectancy improvements.
Secondly, corporate bond yields at the end of 2017 are lower than they were at the end of 2016. Some common benchmark indices show a 0.2% pa fall in yield. The Pension Deficit Index builds these market-related changes into its results. However, companies are increasingly taking a harder look at how they use corporate bond data to derive discount rates for pensions accounting. This can help to offset some of the fall in corporate bond yields we have seen and justify a higher discount rate than would otherwise have been the case.
We don’t pre-empt these sorts of possible changes in the Pension Deficit Index – after all such changes are subject to the judgement of the Boards of the FTSE 100 and FTSE 350 companies. But we will be updating the Index later in the year based on actual 31 December 2017 company reporting.