LONDON, 01 October 2009 The combined pension funding position shown in company accounts for the 200 largest UK privately sponsored pension schemes has improved by £16 billion to show a deficit of £62 billion, and there are signs that this figure may be more stable than in the recent past, according to Aon Consulting, the leading pension, benefits and HR consulting firm.  Previous difficulties with abnormal market conditions wreaking havoc on liabilities are clearing and now companies can plan for the future with a renewed sense of purpose.

One of the challenges for companies with final salary pension schemes is that the funding position is based on both the value of the assets and liabilities.  The volatility in asset values during the credit crunch has been well documented, but the value of the corresponding liabilities has been just as uncertain due to the movement of bond yields.  Now that yields seem to be stabilising at what might be a new long term norm, the volatility in the value of pension liabilities should reduce and companies can get on with confronting the real issue – facing and tackling the remaining pension deficit.

Technical information: The spreads between AA corporate bond and gilt yields, which are one of the key factors underlying the values placed on company pensions accounting liabilities, were stable between 0.5% and 0.7% between July 2003 and 2007 before ballooning out to 2.8% in December 2008.  They have now fallen back to around 1.4% which most market commentators would agree is intuitively reasonable and could be a new long term norm.  At the same time, projected future levels of inflation and the yields available on government securities have also stabilised.

Commenting on the latest figures, Marcus Hurd, head of corporate solutions at Aon Consulting, said: “The era of uncertainty for final salary pensions liabilities is coming to an end.  The real issue of pensions deficit remains, but if the goalposts are at least standing still then there is an increased chance of hitting the target.  Dealing with the remaining pension deficits, whether accounting, funding or buyout, will have to be met by either strong asset performance or yet more pension contributions.

“This is not an easy challenge, but at least now companies can plan for the future. The smart companies will be monitoring the markets closely and using current market conditions as an indicator to lock into more favourable positions in the future.”

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For more information contact:
Josephine Corbett
0207 269 7250
josephine.corbett@fd.com

David Skapinker
020 7505 7478
david.skapinker@aon.co.uk

About Aon Consulting
Aon Consulting Worldwide is among the top global human capital consulting firms, with 2008 revenues of $1.358 billion and more than 6,300 professionals in 117 offices worldwide. Aon Consulting works with organisations to improve business performance and shape the workplace of the future through employee benefits, talent management and rewards strategies and solutions. Aon Consulting was named the best employee benefit consulting firm by the readers of Business Insurance magazine in 2006, 2007 and 2008.  For more information on Aon, please visit www.aon.mediaroom.com.

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