U.K. Plans Saw Light in November

December 2, 2008 (PLANSPONSOR.com) - The funding deficit for the U.K.'s 200 largest privately sponsored pension plans improved by £38 billion in November, the largest single month rise on record, according to an Aon Consulting news release.

The news announcement said plans have leapt back into a surplus of £23 billion. Despite difficult market conditions, current economic conditions “present opportunities as well as risks for employers and trustees,” Aon said.

The Aon200 Index, which tracks the 200 largest privately sponsored pension plan accounting deficits, shows that the overall funding position improved from a deficit of £15 billion at the end of October to a £23 billion-surplus by the end of November. Aon said the change was caused by falling expectations of future inflation, from 3.2% to 2.6% over the month.

To illustrate the U.K. pension volatility seen this year, there had only been six daily swings of £10 billion or more during the six years ending in 2007. In 2008, however, there have been 21 such movements – including six in eight days in October.

Rewriting Plan Finances

“Indeed, at the end of November, the record books have been rewritten for pension plan finances,” Aon wrote.

Other notable findings from Aon include:

  • The largest year on year fall in plan asset value: plan assets plunged £80 billion, the  largest annual drop since pension plans were formed in the middle of the last century. The value of pension plan assets for the Aon200 companies has dropped by almost a fifth (18%) over the year, against a backdrop of FTSE All-share index of equity prices falling by 35%.
  • Projected inflation reached a record high: projected inflation (15 years in the future for pensions accounting purposes) reached 4.2% in July, the highest level since pensions accounting was introduced in its current form in 2001. Inflation then fell back dramatically during the rest of the year, such that inflation is now lower than at the start of the year and has saved final salary plans £45 billion.
  • Corporate bond yields reached their highest level: AA corporate bond yields, the benchmark measure for pension scheme liabilities, rose from 5.75% at the start of the year to 7.75% in October, the highest level since 2001. Rising bond yields have saved plans £60 billion.

More information is available at http://aon.mediaroom.com/file.php/356/Aon+200+november.pdf .