An Aon press release said the 200 largest UK privately-sponsored pension final salary schemes showed a collective accounting deficit of £6 billion at the end of September. At the end of August, the Aon200 Index stood at a deficit of £25 billion.
According to the announcement, the improvement in the funding position is due to three contributing factors:
- The rise in corporate bond yields from 6.5% to 7.3% in September, which reduced liabilities by £50 billion.
- Credit spreads, which reflect the lower price that investors are willing to pay for corporate bonds compared to more secure and liquid government bonds (gilts), have increased sharply during September, which in turn have reduced the value placed on pension liabilities in company accounts.
- The market’s expectation of future inflation has fallen from 3.9% to 3.7% (equating to a £13 billion gain in the Aon200), which helped offset September’s equity market falls of roughly 13%.
However, Paul Dooley, senior consultant and actuary at Aon Consulting warned that the current surplus does not paint a true picture of the health of corporate Britain’s final salary pensions. “Recent falls in asset values have been disguised by a larger reduction in the calculated value of accounting liabilities but employers should not be lulled into a false sense of security by the big improvement in accounting positions. Accounting liabilities have fallen by more than asset values due mainly to increased credit spreads, which reflect uncertainty and liquidity issues in corporate bond markets, rather than any reduction in the real economic value of the underlying promises to members,” Dooley said.