UK Corporate Pension Funds Stabilize in Bond Meltdown Aftermath

Funding levels for U.K. corporate pension funds leveled out in November in the wake of the bond market crisis, while U.S. corporate pension funds saw their funded status drop during the month.

The accounting surplus of defined benefit pension plans for the U.K.’s 350 largest listed companies increased to £31 billion at the end of November from £29 billion a month earlier, after surging by £24 billion the previous month, according to Mercer’s Pensions Risk Survey data analysis for November.

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The value of the pension plans’ liabilities increased to £627 billion at the end of November from £600 billion a month earlier, driven by falling corporate bond yields. However, this was offset by asset values rising to £658 billion during the month from £629 billion.

“The aggregate funding position on an accounting basis appears to have stabilized following the aftermath of the events at the end of September,” Matt Smith, principal at Mercer, said in a statement. “However, many pension schemes are likely to be working through the next steps in relation to both their investment strategy and their broader funding plans.”

Smith added that next steps for pension will include considering The Pensions Regulator’s recent statement stressing the importance of sensible collateral and liquidity management within workplace plans. TPR said that when U.K. government bond prices plummeted, sending yields to 10-year highs, it exposed shortcomings in LDI funds’ resilience and raised liquidity issues for many plans.

“The Pensions Regulator’s recent statement confirms the need for increased focus and tolerances on LDI, as well as strong governance,” Smith said. “But pleasingly they have retained a flexible framework for schemes to work through sensibly.”

Meanwhile, in the U.S., the aggregate funding level of pension plans sponsored by S&P 1500 companies decreased an estimated 2% during November to 107%, which Mercer attributed to declining discount rates that were partially offset by rising equity markets. As of the end of November, the estimated aggregate surplus decreased to $110 billion from $133 billion at the end of October.

“Equities charged forward in November on favorable inflation news and anticipation that the Fed may begin to slow interest rate hikes as early as December,” Scott Jarboe, a partner in Mercer’s wealth business, said in a statement. “However, with signs of an inflation peak, discount rates fell almost 60 [basis points] in November, which increased liabilities significantly, resulting in a net drop in funded status.”