Defined-benefit pension deficits widen, warns Mercer report

Falling corporate bond yields and volatile equity markets are likely to cause a headache for companies that offer their staff defined-benefit pension schemes, research published yesterday shows.

The consultancy group Mercer said that defined-benefit, or final-salary, plans in most developed economies have seen a marked increase in liabilities, resulting in companies facing larger deficits on their balance sheets.

Bond yields affect the values of pension fund deficits for accounting purposes, and while year-end balance sheets may only show additional paper losses, trustees are putting companies under increased pressure to close sometimes burgeoning shortfalls.

"A 50-basis-points fall in discount rates roughly results in a 10 per cent increase in liabilities for a pension scheme," said Frank Oldham, Mercer's global head of pension risk consulting.

"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."

Mercer points out that in the UK, schemes are inflation linked, guaranteeing more stability. However, the group adds that according to its latest data, the aggregate FTSE 350 deficit stood at about £85bn at the end of June.

Equally, equity values in most countries have been volatile throughout 2010, says Mercer, and even though most will end the year in positive territory, companies preparing their financial statements under current market conditions would still report larger pension scheme deficits than those 12 months ago.

In truth, few groups now offer defined-benefits schemes, especially to new starters. In the last year a host of large groups, including Wm Morrison, Barclays, IBM, Alliance Boots and the UK unit of Fujitsu all closed or defined-benefits schemes.

About one in 10 private sector workers have an active defined-benefits plan. The vast majority of private sector employees rely on defined-contribution schemes.