UK - Almost 70% of UK companies intend to reduce contributions to scheme deficits within the next year, Aon Consulting has suggested,even though the aggregate deficit of the 200-largest UK defined benefit (DB) schemes increased to £25bn (€31bn) at the end of August.
Latest figures from the monthly Aon200 Index revealed difficult market conditions in August saw the deficit of the top privately sponsored DB schemes increase by £4bn from £21bn at the end of July.
Aon Consulting claimed the main causes of the £25bn deficit, compared to a £10bn in August 2007, was corporate bond yields rose from 5.75% to 6.5%, which resulted in a £50bn gain for schemes but this was offset somewhat by an equity markets fall of almost 8%, or £25bn and a rise in inflation from 3.35% to 3.9%, which has caused a £40bn loss.
As a result of these market conditions, the Aon200 Index revealed 71% of the 200 schemes are in deficit, compared with 69% in July 2008, however 67% of UK companies plan to reduce deficit contributions from next year as they believe previous contributions should have reduced deficits.
Aon warned the deterioration of pension scheme deficits over the past year means employers "will be in for a shock" at the next actuarial valuation if they think they have already done enough to pay off the deficits.
Marcus Hurd, senior consultant and actuary at Aon Consulting, said: "The threat of an impending recession is causing companies to haul in discretionary spends. Whilst there is an increasing pressure on companies to contribute more into final salary pension schemes to clear deficits, the harsh realities of the economic climate appear to be setting in."
Comparative figures from Aon for the aggregate funding position of the FTSE 100 DB schemes meanwhile revealed a deficit of £14bn at the end of August - a deterioration of 32bn from the £12bn deficit recorded at the end of July.
Hurd said: "Given that 71% of pension schemes are in deficit at the current time, the apparent intent to reduce contributions may seem alarming, but cash is not the only solution to pension scheme funding. Alternative forms of security, such as group company guarantees, can play a significant role to ease the liquidity burdens of UK plc."
As a result he pointed out because pension schemes are long-term investments, "companies are increasingly looking towards longer term solutions" and non-cash security "is on the company agenda in an attempt to stave off short-term liquidity pressures".
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