The aggregate pension scheme surplus, measured by the Aon200 index, has jumped 141% from a deficit of 27bn a year ago to a surplus of 11bn at the end of March 2008, according to Aon Consulting, a leading pension, benefits and HR consulting firm. However, as the credit crunch has shown no sign of abating and the volatility of investment markets continued, many companies faced a major headache as they approached the 31 March year end.
The impact of market falls has been dampened by rising AA corporate bond yields, the benchmark measure of pension scheme liabilities. The rise in AA corporate bond yields to a five year high of almost 7% has cushioned UK pension schemes against much of the market falls. Indeed, when the two influences are combined, many schemes continue to report surpluses on a company accounting basis.
The shift in financial markets, however, poses opportunities as well as problems. In particular, competition in the bulk annuity market has led a number of insurers to price by reference to anticipated returns from corporate bonds. As corporate bond yields have increased, the cost of buying out is now looking attractive relative to historic levels. Since this time last year the cost of buyout for pensioners has fallen by 10-15%, and for deferred pensioners by as much as a quarter. For many schemes, the current cost of buying out pensioner liabilities is likely to be close to (and in some cases below) the liability on the scheme's funding basis.
Commenting on the latest figures, Marcus Hurd, senior consultant and actuary at Aon Consulting, said: ìOver the last few years, a wide range of financial management techniques have been developed to help companies manage pension scheme risk. The panacea for many companies has, however, been to extinguish pension scheme liabilities by passing them to insurers at a reasonable price. Until recently the price has been prohibitively expensive, but the price for buying bulk pensioner annuities is falling dramatically.
It remains to be seen if the insurance market conditions will persist or if this will be remembered as a short window of opportunity. Most companies should review pensioner buy-out as a serious option in the current financial climate.î
Pension schemes end financial year with 38bn of improvements
Many companies likely to review buying annuities for pensioners
