Pension funding levels better than market suggests

Defined benefit pension scheme funding levels may not have been hit as hard as as the stock market conditions suggest.

According to the Mercer Pension update, which used standard accounting measures, the aggregate FTSE-350 pension scheme surplus was £1 billion as at 30 September 2008.

Taking market movements up to 10 October into account, Mercer estimates that despite asset falls of £39 billion, decreasing liabilities have left this £1 billion surplus virtually unchanged.In comparison, there were deficits of £14 billion at 31 December 2007 and £47 billion at 30 June 2008, using accounting standard AIS19.

It also found an increased threat of counterparty risk and corporate insolvency as a fall out from the economic crisis, and called for greater diligence by trustees and companies.

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It noted that there remains an investment bias towards return-seeking assets so exposure to equity market volatility still accounts for a substantial portion of total risk.

The headline equity proportion was estimated at 47% for FTSE-350 companies. However, 25% of FTSE-350 companies continue to hold over 60% of their pension scheme assets in equities. Deborah Cooper, principal in Mercer’s retirement business, said: “Recent equity market falls have been offset, on an accounting basis, by falls in liability values, so company balance sheet liabilities will not have increased by as much as was perhaps expected. However this will not always be the case. Those schemes most exposed to equity markets continue to present the highest risk to their sponsoring employer, especially with the uncertainty in global financial markets.”