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Economic crisis could lengthen deficit recoveries

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  • Economic crisis could lengthen deficit recoveries

UK - Calculations made by Towers Perrin suggest the current levels of corporate bond yields alongside growing defined benefit pension scheme deficits could lengthen funds' recovery times to as much as 20 years.

The firm's pensions team has calculated it will take more than 20 years to return FTSE 100 pension funds to a surplus, based on current contribution rates by sponsoring employers, as volatile bond yields and weak equity markets "have severely impacted pension funds".

While Towers Perrin suggests pension deficits improved slight by the end of March, to £45bn, the reality is the situation could be substantially worse as these figures are based on the existing high yields on corporate bonds, so the realistic deficit is more likely to be £200bn as trustees "take a more conservative view".

John-Paul Augeri, a principal at Towers Perrin, given the huge amount of government debt the UK will have to pay over the coming years, employers will need to deal with their own debt if they are to continue to support their existing pension funds.

 " In order to survive, employers need to understand what they can afford, appreciate the magnitude of the risks they face, and be ready to take advantage of any opportunities to reduce their debt and risk exposure as and when they arise," said Augeri.

Concerns about whether pension funds are able to cope with the current economic crisis are similar to that aired yesterday by Simon McClean, a pensions trustee at the Commerzbank UK €66.7m (€m) closed defined benefit pension fund.

Speaking at a round table meeting of pension fund trustees, hosted by Redington Partners, McClean said he believes pension funds need to look again at their asset allocation and risk strategies, as the level of government bonds expected to enter the UK fixed income market over the next few years is likely to affect long-dated debt and pension fund valuations as a result.

"Steeper [long-term] interest rate curves in higher interest rates will radically alter pension funds. And I don't know that pension funds are ready to adapt to that. Steep curves reduce the long-term liabilities, but more gilts could damage the returns. Providing your asset mix is ready for that and you can move nimbly, you should be ready for it," he added.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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