Trans-Atlantic Pension Differences Exposed

(April 4, 2012)  —  Pension fund deficits on either side of the Atlantic are moving in opposite directions despite similar sponsoring employer efforts as economic forces take over, Mercer Investment Consulting has found.

The largest companies’ pension funds in the United States improved their funding ratios over the first quarter of the year, while their counterparts in the United Kingdom slumped in the time, the consultants reported today.

Mercer said in the US the aggregate deficit in pension plans sponsored by S&P 1500 companies fell to $336 billion at March 31, 2012, a decrease of $147 billion from the end of 2011. This meant the aggregate funding ratio improved from 75% to 82% over the three months.

Conversely, in the UK Mercer estimated the aggregate IAS19 measure of the FTSE350 pension schemes’ deficits stood at £81 billion at the end of March, up from £73 billion at the end of December. This represented a funding ratio drop from 87% to 86%.

Both sets of companies had injected additional cash contributions totalling $20 billion and £20 billion respectively, in efforts to shore up deficits.

Mercer added that the deficit of pension funds of the largest 350 UK companies is £17 billion higher than a year ago. A boon of higher corporate bond yields, which reduced liabilities slightly, did nothing to offset the effect of market conditions hurting assets.

Adrian Hartshorn, Partner in Mercer’s Financial Strategy Group, said: “This highlights the potential downside of running a mismatched investment strategy. Even in this period of low interest rates there remain attractive opportunities for companies and trustees to reduce risk either through seeking some attractive investment opportunities or through managing the liabilities.”

In the US, the advice was the same for pension funds: to address the potential downside and manage liabilities through derisking.