UK roundup: LCP, Aon Hewitt

UK - UK companies’ pension fund deficits have plummeted, according to consultancy LCP in its latest ‘Accounting for Pensions’ report.

The consultancy said there had been a drop of almost two-thirds in big businesses’ deficits in 2010, with the aggregate FTSE 100 pension deficit, which last year stood at £51bn (€58.5bn), falling to £19bn.

LCP attributed this drop to a number of factors, but the switch from the retail prices index (RPI) to the consumer prices index (CPI) as an inflation measure played a key role, it said, citing companies such as BT, which reduced its liabilities by £3.5bn this year.

Bob Scott, a senior partner at LCP, said that while the report was good news for companies, employees might well see a reduction in their pensions.

Due to the variation in available pension schemes, LCP said it expected the shift to CPI to affect members of each scheme in different ways - some might be unaffected, some could lose as much as 25% of the value of their pension.

The consultancy said the momentum of 2009’s record year was carried into 2010, with HSBC making contributions 350% larger than those of last year.

However, more than half of the £17bn paid into the FTSE 100 went toward the reduction of deficits, rather than benefits for employees.

In other news, Aon Hewitt, examining deficit reduction last month, reported an almost 14% drop in shortfalls.

However, the consultancy noted that volatility in the equity and bond markets had led to sharp fluctuations during the month.

According to company, on 27 July, the collective final salary pensions accounting deficit of the UK’s FTSE 350 companies stood at £38bn (€43bn), down from £44bn at the end of June.

However, the consultancy firm noted that the improvement of more than £17bn at the beginning of July - which left the deficit level at £27bn and led to improved investor confidence - was quickly reversed at the end of the month, when the combined deficit stood at £45bn following an £18bn reversal.

Marcus Hurd, principal and actuary at Aon Hewitt, said: “While swings in funding level are challenging, they can offer opportunities for schemes to reduce their deficits.

“Schemes can use these swings, whether caused by changes in asset or liability values, to de-risk.

“They can lock in the improvements to funding levels through reductions in allocations to higher-risk assets and greater hedging.”

Colin Robertson, global head of asset allocation at Aon Hewitt, added: “One method of exploiting market movements is through the use of triggers, as they provide a rigorous framework for trustees to follow when seeking to reduce risk.

“At a basic level, schemes can implement triggers by monitoring their funding positions to take advantage of market movements.

“However, at the same time, trustees should be aware of the valuations of equities and bonds, as well as the underlying market conditions, and take those into account when setting their triggers.”

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