Pension deficits improve despite market volatility

Rising bond yields and favourable investments have seen pension deficits improve, despite market volatility during August and continuing underlying volatility.

During August, the aggregate deficit of the largest 200 UK pension funds reduced slightly from £13bn to £10bn according to Aon Consulting’s August 2007 FRS17/IAS19 Tracker. However, the volatility of the deficit was also clear as it peaked at more than £26bn but also fell below £1bn during the month.

During the fortnight of turmoil in the market, approximately 10% of schemes moved from surplus back into deficit but despite these falls, even at the peak of recent turbulence, the deficit had only returned to 31 March levels, the date at which most companies last reported deficits in company accounts.

The analysis tracks the deficit for the UK’s 200 largest defined benefit schemes, including all of those in the FTSE 100.

Pensions deficits have been relatively protected because AA corporate bond yields, the benchmark measure of pension scheme liabilities, have steadily risen over the year.

Marcus Hurd, senior consultant and actuary at Aon Consulting, said: “This summer’s credit crunch fortnight posed a real headache for pension scheme managers. Despite market falls during the middle of August, however, pension deficits have actually improved over the month as a whole. Pension schemes are long-term investments and the overall impact of credit crunch has been small so far, but nevertheless, losing £25bn in 10 days can be difficult to watch.

“It is likely that schemes will increasingly seek to de-risk at levels of funding that balance affordability with an acceptable degree of risk. Once the target is established timing is critical, because, in volatile market conditions, the window of opportunity can be short lived and may not return for months or even years.”