Despite improved reported funding levels, February was a bleak month for the future of final salary pension provision, according to Aon Consulting, a leading pension, benefits and HR consulting firm.
The Aon200 Index, which tracks the surplus (or deficit) of the 200 largest UK privately-sponsored pension final salary schemes, improved from a deficit of 12billion at the end of January 2008, to an all time high surplus of 21 billion at the end of February. Over half (62 per cent) of schemes are now in surplus, representing a significant month on month improvement.
However, proposals by the Accounting Standards Board (ASB)[1] and a mortality assumption consultation from The Pensions Regulator (TPR)[2] threaten the future of scheme funding levels. To illustrate the potential damage of these plans, Februaryís actual surplus of 21 billion would fall to a deficit of around 180 billion if the data were recalculated (as measured by the Aon200 Index) to take into account the combined effect of the ASB and TPR proposals. Few, if any, schemes would be in surplus.
The ASB has proposed that companies should be required to record pension deficits in their company accounts related to risk-free rates, which would add approximately 120 billion to the Aon200 Index of deficits.
Separately, TPR has proposed a considerably more prudent mortality assumption for funding purposes than those currently used by UK companies. If companies were also to adopt these new assumptions, then the impact would be to raise life expectancy assumptions for new pensioners retiring at age 65 from around 85 to 90, thereby adding over 75 billion to reported liabilities. This figure, combined with the impact of the ASB proposals, represents an addition of almost 200 billion to scheme liabilities.
The main reason for the improvement in the month-on-month funding levels is the continued widening of the AA credit spread following credit crunch. AA Corporate bond yields, the benchmark measure for pension scheme liabilities, have reached a seven-year high.
Commenting on the latest figures, Marcus Hurd, senior consultant and actuary at Aon Consulting, said: ìThere are two sides to the final salary story in February: on the positive side, after record falls in January, schemes have recovered to record levels of surplus. However, the double whammy of ASB proposals and the Regulatorís proposed mortality assumptions throw the future of final salary schemes into further doubt.
ìThese proposals add more pressure on companies to close their final salary schemes to members or find ways to terminate their liabilities. Tomorrowís generation of pensioners are being required to take pensions risk themselves, whereas many companies had historically agreed to shoulder the responsibility. The current pensions environment punishes companies for demonstrating paternalism to their employees. The future of the UK pensions industry would be best served by encouragement rather than regulation or interference.
ìContinued uncertainty over the future of final salary pensions means it is likely that company sponsors will increasingly look towards the various forms of settling or managing their pension liabilities, especially as the cost of doing so is falling.î
Pension schemes show record surpluses, but face uncertain future
Surpluses rise to all time high but pension scheme liabilities could increase by over 200billion following recent proposals from the ASB and the Pension Regulator
