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Credit crunch sees deficits drop to £3bn

UK - The combined deficit of the defined benefit (DB) pension plans for FTSE 100 companies has been almost wiped out in the past 12 month, a study by Aon Consulting has found.

In the study, published today, the firm says: "The aggregate deficit of the 200 largest UK DB pension schemes has improved dramatically by £38bn (€53.4bn) during the year, from £41bn in December 2006 to £3bn in November 2007."

The £3bn aggregate deficit at the end of November represents 49% of schemes being in surplus.

Aon added the average funding level of such schemes is now at 99%, up from 92% in 2006, in its  latest monthly tracker of aggregate net surplus (or deficit) for the UK's 200 largest DB schemes, including all those in the FTSE 100.

According to the consultant, 2007 is on course for being the second year in succession companies will record pensions deficit gains in excess of £30bn.

Aon named improved corporate bond yields as the main factor for the decreased deficits, further arguing corporate bond yields are the contentious benchmark measure of pension scheme accounting liabilities, as they have improved despite stable government bond yields.

"The increased difference between the two measures reflects that the market is pricing a higher risk of default of UK companies following this summer's tightening of credit conditions," added the firm.
 
Marcus Hurd, senior consultant and actuary at Aon Consulting, said: "Considerable gains are likely for the second consecutive year, which will ease the short-term balance sheet pressures for company finance directors."

That said, he warned volatility persists, and advises companies to review pension scheme risk while the accounting balance sheet remains strong.
 
Hurd concluded: "Ironically, the second year of gains has been driven by the market pricing higher credit risk on corporate bonds. Critics of pensions accounting standards will argue that these gains are superficial, but the reality of company reporting is that these gains will be reflected in company accounts."

If you have any comments you would like to add to this or any other story, contact Carolyn Bandel on +44 (0)20 7261 4622 or email carolyn.bandel@ipe.com

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