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Impact Investing

IPE special report May 2018

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Disparity between US and UK fund deficits

GLOBAL – The overall pension fund deficit level among top US firms is expected to have increased by 65% to $129bn (€109.7bn) by year-end, while UK deficits are largely unchanged at around £70bn, Aon Consulting reckons.

This surge in the US deficit – from $78bn in December 2004 – has been largely attributed to low interest rates, low investment performance, and lower corporate funding of pension schemes.

“It is clear that US deficit levels have been highly susceptible to change in recent months – ranging from 79% to 91% funded from December 04 to October 05. We expect this volatility to continue for the rest of this year,” said Aon’s US-based analyst Brad Klinck.

The fact that UK liabilities have increased 10% due to falling discount rates has been countered by a more than 10% increase in pension scheme assets.

“In fact 2005 has been a surprisingly stable period for FRS17 deficits overall; Aon estimates that the total deficit has remained in the range £69bn to £58bn,” stated the report.

According to Andrew Claringbold from Aon Consulting in the UK: “In the UK, the funding level is particularly sensitive to index-linked gilts and the corporate bond yield spread over gilts.

“If either index-linked gilt yields or the corporate bond yield spread rose by only 0.5%, then the FRS17 deficit would fall by over a half.”

The Aon analysis - including details from 80 Fortune 100 companies sponsoring defined benefit plans, and 200 of the UK’s largest companies, including the FTSE 100 and the FTSE 250 – will be conducted on a regular basis.

An Aon spokesperson told IPE that it would be sent out annually or more regularly based on market changes.

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