Deficits near 2007 levels as schemes wise up

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  • Deficits near 2007 levels as schemes wise up

UK - Deficits of the 200 largest UK final salary schemes improved by £8bn (€10bn) during July, as pension funds increased and adopted more sophisticated investment activity during the second quarter of this year, suggests research from Aon Consulting.

The Aon200 Index, which tracks the fluctuating surpluses or deficits of the UK's 200 largest privately-sponsored final salary pension schemes on a monthly basis, shows July's deficit improved by £9bn, bringing deficits back into the region of July 2007's £8bn.

The index' comparative figures for the FTSE 100 companies show the total surplus - and deficit - under FRS17/IAS19 fluctuated broadly in the past 12 months, with deficits hitting £8bn in July 2007, improving to £5bn in September that year, falling again into deficit by January 2008, only to recover and then to drop by £24bn in one month's time in May.

Aon argues the improved deficits are the result of a fourfold increase in investment activity in the second quarter, when pension schemes began shifting from equities to alternative growth investments and diversified growth portfolios.

Secondly, schemes increased their exchange of low-yielding government bonds for higher-yielding corporate bonds "to take advantage of the higher returns currently being offered by the corporate bonds relative to historic levels during credit crunch market conditions," said Aon.

Marcus Hurd, a senior consultant and actuary at Aon, commented: "The effects of the credit crunch have prompted companies and pension scheme trustees to take a more sophisticated approach to pension scheme investment strategies." 

He added: "Increasingly, schemes are shunning equity investments in favour of a wider range of alternatives including diversified growth portfolios."

He concluded schemes also have been taking advantage of historically high corporate bond yields, caused directly by the credit crunch phenomena, and are shifting out of government bonds into the higher yield corporate bond securities.

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