Shortfall for defined pension plans
Updated on 01 July 2009
The funding shortfall faced by the UK's biggest defined benefit pension schemes nearly doubled during June, figures show.
The country's 200 largest defined benefit schemes, including final salary pensions, had a collective deficit of £73 billion at the end of the month, according to Aon Consulting.
It said the shortfall had soared by 80% during the month, largely on the back of falls in corporate bond yields, which increase the liabilities faced by pension schemes.
Schemes have now seen the value of their assets dive by £50 billion since the early stages of the credit crunch in September 2007.
The group warned that the current volatile investment conditions were increasing the pressure on companies to move money out of high risk investments such as equities. It added that changes to pensions accounting legislation and proposals that levies to pensions safety net the Pension Protection Fund should reflect a scheme's investment strategy were also likely to cause a move away from shares.
Sarah Abraham, consultant and actuary at Aon Consulting, said: "Whilst market volatility coupled with changes to legislation may increase the pressure on trustees to move out of equities, trustees and sponsors must think carefully before eliminating too much of their equity exposure.
"It should not be forgotten that these assets still have significant advantages for pension schemes.
"Despite their inherent volatility, the expected return on equities is higher than on fixed interest assets, meaning that over the long term the risk should be 'rewarded'."
Meanwhile, research estimated that companies are saving £4.53 billion a year in pension contributions by withdrawing their final salary schemes.
Retirement income group MGM Advantage said there were now two million fewer people in defined benefit schemes than in 1995, with most companies that had closed final salary schemes replacing them with less generous defined contribution ones instead. It said employers paid an average of 15.6% of workers' pay into final salary schemes, but they made contributions of just 6.5% into defined contribution pensions.
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