Pension scheme shortfalls 'narrow'
Updated on 01 October 2008
The funding shortfalls faced by pension schemes narrowed during September despite steep stock market drops, figures showed.
The deficit faced by the UK's 200 biggest defined benefit schemes, which includes final salary pensions, improved from £25 billion at the end of August to just £6 billion now.
The reduction in the deficit came despite stock markets falling by around 13% during the month, according to Aon Consulting.
The improvement was driven by a rise in corporate bond yields from 6.5% to 7.3% in September, which reduced pension scheme liabilities by £50 billion.
The value placed on pension scheme liabilities in company accounts was further reduced by a sharp increase in credit spreads, which reflect the lower price that investors are willing to pay for corporate bonds compared with more secure and liquid Government bonds or gilts.
Market expectations about the future rate of inflation also fell from 3.9% to 3.7%, equating to a £13 billion gain for the UK's 200 biggest schemes.
Paul Dooley, senior consultant and actuary at Aon Consulting, said: "As the markets tumble, it might be expected that pension deficits worsen, but company accounting figures defy this because pensions accounting standards are showing even bigger falls in scheme liabilities."
But he added that companies should not be lulled into a false sense of security by the latest funding figures.
He said: "Recent falls in asset values have been disguised by a larger reduction in the calculated value of accounting liabilities but employers should not be lulled into a false sense of security by the big improvement in accounting positions.
"Accounting liabilities have fallen by more than asset values due mainly to increased credit spreads, which reflect uncertainty and liquidity issues in corporate bond markets, rather than any reduction in the real economic value of the underlying promises to members."
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