OECD spotlight on UK difficulties

FRANCE – UK pension schemes could see their funding levels fall further into deficit, even if stock markets do not worsen, says the OECD, based in Paris.

In its ‘Financial Market Trends’ report, the OECD highlights the pensions crisis being faced by its member countries, underlining the UK as being in a particularly difficult situation.

Market downturn, underestimations of gains in life expectancy, and declining interest rates have all played a part in creating funding gaps in pension schemes, says the OECD, and UK pension funds’ high allocation to equities makes it more at risk than its counterparts.

“While a recovery would lessen the shortfall, there is some risk that the situation may grow worse, even if there is no further decline in markets,” says the report, and it is suggested that accounting rules in the UK could aggravate the UK’s funding gap.

“For example, pension fund assets will have to be marked to market value while an AA corporate bond yield will be used as the discount rate on pension fund liabilities. In this case, low interest rates on high quality assets will aggravate the funding gap.”

The reasoning being that under FRS17 AA corporate bond yields are used as a discount rate to calculate the value of pension fund liabilities, so if bond yields fall, the reported size of pension fund liabilities could rise.

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