The combined pension liabilities shown in company accounts for the 200 largest UK privately sponsored pension schemes has hit £500 billion for the first time, according to Aon Consulting, the leading pension, benefits and HR consulting firm. This places the estimated combined liabilities for all Britain’s 8,000 private final salary pension schemes at over £1 trillion.
At the same time, despite the recovering equity market, the accounting deficit of the largest 200 privately run final salary schemes has remained fairly steady at £78bn at the end of August, up only slightly from £73bn at the end of July, according to the Aon200.
The increase in pension scheme accounting liabilities is occurring largely because of declining corporate bond yields, which are starting to normalise following their abnormally high spike resulting from the credit crunch phenomena.
Many analysts would claim that the spike in corporate bond yields had previously masked the true extent of the pension scheme liabilities and that normalisation is revealing a more representative picture. The spate of recent closures to pension schemes will help to manage future benefits, but does not impact on the benefits already awarded to members. It is these existing liabilities that are continuing to rise and need to be managed effectively.
Commenting on the latest figures, Marcus Hurd, head of corporate solutions at Aon Consulting, said: “There have been several high profile cases of schemes closing to accrual, but this only manages future costs and does nothing to eliminate existing liabilities. Liabilities have reached such a staggering high because they continue to balloon in the aftermath of the credit crunch. What’s more, there could well be more bad news in the pipeline. Despite improving equity markets, the only real guarantee for pension funds is further volatility as gilts and bond yields are set to fluctuate.
“Closure is often the first step in pension scheme management, but the real benefits come after the high profile actions through a structured approach to removing and managing liabilities through risk management. The aim should be to ensure that all pension scheme members get the benefits they are promised, whilst minimising the burden on the company.”
