UK - Surpluses of the UK’s 100-largest companies had improved again to around £33bn (€42bn) by the end of last week’s roller coaster market developments, according to consultancy Watson Wyatt, reflecting the volatility of pension numbers in companies’ accounts.

Watson Wyatt estimates in less than six months FTSE100 companies saw the £40bn surplus at the end of March turn into a £12bn deficit in August - the largest for 16 months.

However, after a volatile week on the stock markets, equity markets rebounded on Friday, and surpluses improved to around £33bn by the end of the day.

John Ball, head of defined benefit consulting at Watson Wyatt, noted not only do share prices affect the surpluses and deficits that companies have to disclose on their balance sheets, but the way pensions are accounted for also means liabilities appear smaller when investors think there is more chance certain companies will not pay their debts.

“As far as the accountants are concerned, FTSE 100 pensions are back in surplus. However, what really matters is the pensions that companies have to pay and the money they have to pay them with,” he stated.

In a statement released over the weekend, Watson Wyatt said since the end of August expected future inflation has fallen, reducing the estimated payments that pension funds will need to make in future.

Accountants use AA corporate bond yields to convert a stream of payments into a single liability number. Higher AA corporate bond yields have made these liabilities smaller.

“In the early part of this month, these effects outweighed the impact of falling share prices on the surpluses and deficits in companies’ accounts. By 12 September, the £12bn combined deficit had turned into a £7bn surplus.”

In the early part of last week, these factors cushioned the impact of falling share prices on the deficits and surpluses in companies’ accounts, causing that by Wednesday, the aggregate surplus had fallen only slightly and was still almost £7bn.

When equity markets rebounded on Friday, there was no corresponding increase in pension liabilities, and surpluses improved again.

A rule of thumb used by the Pensions Regulator (tPR) and Pension Protection Fund (PPF) is a 2.5% change in share prices has an impact of roughly £12bn on the value of assets in the pension funds covered by the PPF, which are largely private sector defined benefit schemes.

By the end of Thursday, the FTSE all-share was down 9.4% on the week, but it had recovered on Friday to end the week down 1.7%.

Without allowing for international diversification, this suggests pension funds’ equity holdings were down by around £45bn on the week by the end of Thursday, but ended the week down by roughly £8bn.

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