UK - Trustees need to consider more frequent monitoring of the employer covenant as falling equity markets wiped £36bn (€46bn) from the value of the top 200 UK defined benefit pension scheme and created an aggregate deficit of £30bn, Aon Consulting has revealed.

Figures from the firm's monthly Aon200 Index showed 31% of the pension funds fell from a surplus in May to a deficit in June, which increased the overall number of schemes in deficit to 75%.

The Aon200 Index highlighted that in June 2008 the aggregate pension scheme deficit deteriorated by £36bn moving the aggregate funding of the top 200 schemes from a surplus of £6bn to a deficit of £30bn.

As a result, the figures showed only 25% of schemes are now in surplus, compared to 56% the previous month, although the consulting firm admitted equity losses had been slightly offset by rising bond yields.

Marcus Hurd, senior consultant and actuary at Aon Consulting, pointed out pension scheme finances are expected to be volatile, so for most schemes a one-month fall of £36bn "should not cause undue concern".

However, Aon said the impact of current economic conditions on employers may pose a risk to the security of the pension scheme and, as a result, trustees should consider whether their scrutiny of the employer covenant is frequent enough.
The consulting firm admitted many pension schemes have a strong sponsoring company and will be able to cover the shortfall, but it warned that while "a number of trustees" monitor the covenant on an annual or more frequent basis, others leave it much longer.

Aon claims trustees are presented with a challenge, as they need to understand the impact broader economic conditions are having on the employer in order to take action to strengthen the security of the scheme.

Hurd said: "Some pension scheme trustees are tempted to pay only lip service to the employer covenant and the agonising truth will emerge over time. The argument for trustees to conduct more frequent monitoring than an annual assessment gets only stronger as the economic outlook worsens."

Meanwhile, research from rival consulting firm Watson Wyatt showed DB pension schemes belonging to companies in the FTSE100 moved from an aggregate surplus of £8bn to a deficit of £23bn in June.

Watson Wyatt revealed the figures, on an FRS17 basis, also showed the total funding position of the FTSE 100 DB schemes had worsened by £50bn over the past three months, which it attributed to falling equity prices and rising inflation expectations.

Figures suggested in June falling asset values reduced surpluses by £20bn, while inflation expectations added an additional £18bn to liabilities, albeit the increase in liabilities was reduced to £11bn overall by the higher corporate bond yields.

Rashpal Bhabra, head of corporate consulting at Watson Wyatt, said the changes in the funding position "has come at a bad time for finance directors preparing half-yearly reports" as those who had planned to report a surplus a few weeks ago must now report a deficit.

"The thing that makes June stand out is the spectre of inflation making benefits significantly more expensive at the same time as asset values fell. There was some mitigation from an increase in corporate bond yields, but not enough to stop a deficit re-emerging", Bhapra added.

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