The accounting deficit of the 200 largest privately sponsored pension schemes remained relatively stable during November, increasing by £2bn to £71bn at the end of the month according to the latest Aon Hewitt 200 Index. If this pattern continues into December, this year will have seen the most stability in pension scheme funding levels since 2006, says the the global human resource consulting and outsourcing business of Aon Corporation (NYSE:AON).
Although stability in the balance sheet may be welcomed, many employers will be hoping for further improvements in their accounts before conditions stabilise. The typical accounting deficit for defined benefit schemes has increased by around 50%, an average deficit of 55bn in 2006 to an average deficit of 87bn in 2010*, a tangible sign of the impact that these arrangements are having on employers.
The impact of the financial crisis caused market conditions to become volatile which has resulted in large swings in pension scheme deficits, according to Aon Hewitt. Material movements in the funding level from one month to the next are unpopular with employers because of the difficulty they cause in predicting what the end of year pensions balance sheet might show.
With Government proposals to link private pension payments to the Consumer Prices Index (CPI) rather than the Retail Prices Index (RPI) expected to be confirmed in the coming days, many companies will be integrating that change into their accounts for the first time this month. Aon Hewitt believes that this could result in a reduction of £35 billion to the deficit of the Aon Hewitt 200 pension schemes. However, the precise impact of this will only be understood as companies file accounts.
Commenting on the latest figures, Sarah Abraham, consultant and actuary at Aon Hewitt, said:
“In the aftermath of the financial crisis, pension deficits crept up to record highs. For example, in mid-June 2010, the deficit reached its highest level of £112bn. In recent months, deficits have started to reduce, although this trend appears to have stalled. Stability is a good thing for any company trying to get a handle on the size of its pension scheme obligations, however, many employers will have been relying on further market recovery to recoup some of the losses incurred in recent years.
“If conditions during 2011 remain relatively stable, then we would expect employers to take the opportunity to better understand the current state of their pension schemes and how they might be best managed in the future. With cashflow constraints also having relaxed for many employers, risk reduction is likely to be a key consideration for many companies next year.
“Depending on regulation and how it is approached by companies and trustees, and as a result of the shift from RPI to CPI, we predict a decrease of up to £35 billion to the Aon Hewitt 200 deficit. This is large enough to make a dent in the deficit of the Aon Hewitt 200, but is nowhere near enough to wipe out the aggregate deficit and send it into surplus.