John Hawkins, principal in Mercer’s financial strategy group comments: “There would have been a substantial impact on company valuations if FTSE 100 companies had reported in mid-August. The data highlights the volatility of accounting deficits. We are continuing to see efforts by sponsoring employers to reduce the risk of pension deficits while, at the same time, there has been a growth in the options available for transferring risk.”

According to Mr Hawkins, any company adopting a strategy with fewer risks by switching from equity holdings into liability matching bonds at the end of June could potentially have made a significant improvement in their position.

This demonstrates the benefits of de-risking to scheme sponsors, in terms of funding and competitive positioning, and to members in terms of benefit security. It highlights the need for pension schemes to be prepared to capitalise on opportunities for de-risking as and when they arise.

Although the current funding position may appear strong, the unpredictability experienced over the past quarter highlights the risk to scheme sponsors and members alike especially considering that in mid-August, the aggregate FTSE 100 pension deficit was as high as £30 billion.

“The traditional buy-out market continues to be top of mind for most companies when considering a full de-risking solution. But a number of other options are either available or are being developed, and these could also be considered,” says Mr Hawkins.

“These include the ability to hedge longevity risk with the use of longevity swaps and the sale of pension schemes to new ‘sponsors’. As they are not regulated like insurers, these new sponsors can potentially offer competitive pricing compared to traditional buy-outs,” he adds.

© Fair Investment Company Ltd

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