The pensions deficit of the 200 largest privately sponsored final salary schemes has reached its smallest level since September 2009 and stood at £69bn at the end of October according to Aon Hewitt, human capital consulting and outsourcing solutions firm. This compares to the £80bn deficit recorded on 30 September 2010.
The main reason for this improvement and 2010 high for the Aon Hewitt 200 is due to buoyant equity markets whilst bond markets (the benchmark measure for valuing scheme liabilities) have remained relatively stable.
Given the significance of a single date used for company accounting purposes, businesses which reported at 30 September have been unable to take advantage of this recent improvement in stock market performance. However, for those companies working to an accounting date of 31 December, market performance for the final two months of the year will be critical according to Aon Hewitt.
Pension Schemes run a multitude of financial risks and, in the run-up to 31 December, finance directors will be sensitive to the key market drivers of the pension scheme deficit. In conjunction with pension scheme trustees, they should consciously choose which exposures to retain and whether or not to lock-in the gains their schemes have made.
Given market volatility, however, the possibility of schemes returning to full funding, whilst unlikely, is not completely outside the realms of feasibility. Aon Hewitt say that for many finance directors, this year’s Christmas wish list will doubtless include either a jump in equity markets of 20%, a rise in corporate bond yields to 6% from their current levels of 5.15% or a decrease in projected long-term inflation to 2.5% from its current 3.35% – all of which would eliminate the deficits.
Commenting on the latest figures, Marcus Hurd, principal & actuary at Aon Hewitt, said, “This good news has been a long time coming for many UK businesses whose final salary schemes have struggled with volatile market conditions in recent months and ongoing uncertainty. What will be telling is what businesses decide to do with this positive news and whether they put pressure on scheme trustees to adapt their investment strategies in the final two months of the year. Those with strong and more positive views of the market will be looking to capture further gains before the year is out, whilst others will be seeking to protect against losing gains that have been made on the year to date.
“Unfortunately we fear that when they look in their Christmas stocking, the only present businesses can expect is volatility and maybe a pair of festive socks. ”
Source : Aon Hewitt Press Release
