At Top UK Firms, Pensions See Declining Deficits

(August 3, 2010) — A study by consultant Aon has revealed the aggregate pension deficit of the UK’s biggest corporate pension funds fell by 26% in July.

Scheme deficits are at their lowest level since the end of October 2009, as improving equity markets and falling liabilities helped decrease deficits at corporate DB pension schemes, which had a total of 74 billion pounds ($116 billion) of deficit at the end of July, compared with 100 billion pounds the previous month.

Over the year to date, the aggregate pension deficit of the top 200 companies averages out at 91 billion pounds.

Despite the positive news, the consultant also warned of overfunding, saying that surpluses could prove problematic in the relatively near future. The firm cautioned that a proposed change to the inflation measure used to calculate increases to pension benefits could throw a sudden curve ball to many companies making deficit-recovery contributions to their DB pensions. Under the switch by the UK government to consumer price index (CPI) linking in order to track inflation, around half of schemes could find themselves in accounting surpluses depending on how the legislation is applied.

“The problem with these schemes is that they’re so volatile,” Sarah Abraham, a consultant and actuary at Aon, told ai5000. “A low aggregate deficit now is good news if deficits stay low, but we do face a risk of overfunding – companies have limited amounts of cash, and don’t want to throw that cash into a pension scheme, where there is a gamble that they may be putting in more than they need to and not maximizing the potential of that cash,” she stated.

Previously, the National Association of Pension Funds had warned that linking UK pension schemes to CPI rather that the retail price index (RPI) could lead to a misalignment of investments versus liabilities.