News Releases

London
AOC

London, 2 November 2009 Expected future increases in the UK’s inflation rate have massively increased the deficit of the 200 largest privately sponsored defined benefit (DB) pension schemes during October, according to Aon Consulting, the leading employee risk and benefits management firm.  To a lesser extent, a small dip in asset values also contributed to the deficit ballooning by £15 billion to £77 billion, all but wiping out the £16 billion gains made in September.

Expecations of future inflation levels are a key cause of pension scheme funding volatility.  Although there have been positive economic signals recently, expectations of higher inflation returned  in October after a period of relative stability, causing the large rise in the pensions accounting deficit.

Sarah Abraham, consultant and actuary at Aon Consulting, comments: “Currently many investors believe that the Government will be unable to to deliver its annual inflation target of 2%. This increases pension scheme deficits because most pension schemes promise to pay benefits that are linked to inflation.

“The position is very volatile because if this lack of confidence in achieveing inflation targets worsens, then pension schemes can expect deficits to increase even further. On the other hand, if the market had confidence that inflation will remain under 2%, pension scheme deficits would decrease by a massive £60 billion. Any sign that high levels of inflation can be avoided will greatly help pension scheme finances.

“Managing inflation expectations, however, is not the only path to improving pension scheme finances.  For example, if other factors like mortality, interest rates and wage bills remain the same, then annual asset rises of 8% would be enough to remove pension scheme deficits within 7 years.”

Ends

For more information please contact:

Leo Wood / Josephine Corbett
0207 269 7137/ 250; +44 (0)7737 679 460 / +44 (0)7868 739 717
leo.wood@fd.com / josephine.corbett@fd.com

David Skapinker
020 7505 7478
David.skapinker@aon.co.uk
http://aon.mediaroom.com

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 229 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.

Safe Harbour Statement: http://aon.mediaroom.com/index.php?s=67

Aon Consulting Limited is authorised and regulated by the Financial Services Authority