Aon: US Plans in Better Shape than UK

August 16, 2005 ( - US employer pension plans are four times as likely to be fully funded than their UK counterparts, according to a new Aon Consulting study.

An Aon news release said that the consulting firm estimated that only 5% of UK pension plans are fully funded compared to 20% of US pension plans for year-end 2004 based on company annual reports.

On average, the pension plan deficit of a US company represents around two months worth of pre-tax profits, compared to seven months of pre-tax profits for the average UK company, according to the report. Not only that, but about one in four UK firms have pension plans with a deficit representing over 24 months worth of profits, putting a significant strain on profitability, while less than 5% of US companies are in a similar position.

Aon found that US pension plans were 91% funded based on FAS87 assumptions at the end of 2004, which compares with 85% funded for UK companies based on FRS17 assumptions, for the same period ( see footnote below ). One of the main reasons why US pension plans are better funded is because US companies have put in cash contributions of over 10% of plan assets over the last two years ($90 billion), compared with only 7% for UK companies (25 billion pounds sterling).

Contributions to UK pension plans have doubled over recent years. However, this increase in contributions has been insufficient to compensate for a combination of falling bond yields, increasing life expectancy and poor equity performance, Aon said.

Commenting on the analysis Andrew Claringbold of Aon Consulting in the UK said, “The fall in bond yields has had more of an impact in the UK than in the US. This is because benefits for most leavers and retirees in the UK have to be increased each year in line with the retail price index. Therefore, the amount of money required in the pension plan to meet these benefits is more susceptible to longer-term interest rates. This is not a standard pension requirement in the US.

“Even though most large US plans are well funded, a significant number have recently looked to address funding concerns by making contributions well in excess of their minimum required contribution levels, increasing the funded status both of those specific plans, and of the group as a whole,” Brad Klinck of Aon Consulting in the US, said in the news release.

NOTE REGARDING SURVEY DATA FROM THE PRESS RELEASE: The Aon Consulting research compares pension information data for US companies (using FAS87 accounting rules) with similar data for UK companies (using FRS17 accounting rules). Assets are measured on a market value basis in both countries. While FAS 87 allows the use of a “smoothed” asset value for purposes of calculating the annual pension expense, we used market value in all calculations. Liabilities are measured using the projected unit credit method with a discount rate based on current high-quality corporate bonds in both countries.    Therefore, in theory the liabilities are comparable between the countries.