LONDON (1 September 2015) - Aon Hewitt, the global talent, retirement and health solutions business of Aon plc (NYSE:AON), has said that recent falls in equity prices and the continued low level of gilt yields will have painful implications for pension schemes – and particularly those with weaker employer covenants and those that have an actuarial valuation in progress.
Matthew Arends, partner at Aon Hewitt, said:
"World equity markets continue to be volatile following sharp falls in prices and most pension schemes will have seen a fall in asset values similar to other investors. Our figures indicate that the assets of pension schemes of FTSE 350 companies have lost approximately £30 billion since 1 April 2015. However, a pension scheme also needs to consider the value of its liabilities, which typically remains high due to stubbornly low gilt yields – we estimate the wind-up liabilities of FTSE 350 companies have increased by almost £15bn over the same period. The consequence is an unpleasant ballooning of their deficit in the past few weeks.
"We don’t generally advocate pension schemes making knee-jerk reactions to volatile markets but where a pension scheme is supported by a weak covenant, trustees will need quickly to take stock of increasing deficits and consider the viability of their funding plans. Pension schemes in the middle of an actuarial valuation also face a dilemma. In this situation, the current size of the scheme deficit is of increased relevance and there is a case for both trustees and employer taking stock of the new deficit situation before agreeing to a funding plan.”
Matthew Arends continued:
"Funding regulations permit the actuary to sign off the schedule of contributions based on the position either at the valuation date or at the date of signing. Ordinarily, pension schemes would be reluctant to change their policy on this point between valuations, but if a valuation is underway and the current deficit is substantially larger than it was at the valuation date, trustees and employers will need to be confident in the covenant strength if they are not going to take this into account. Additionally, the rising deficit may itself have caused a weakening of the employer's covenant."
John Belgrove, senior partner at Aon Hewitt, continued:
"The Pensions Regulator has long been advocating considering both the contribution plan and the investment policy in the light of the employer's covenant strength. The recent market turmoil is one situation where the importance of assessing all key ingredients together is clear. For pension schemes with weaker employer covenants, the market price movements will be especially concerning, particularly as these schemes may need to take investment risk in order to pay off a deficit.
"The double effect of falling equity prices and lower yields will be particularly painful for under-hedged pension schemes and those with large equity holdings. We continue to advocate reviewing hedging levels and the degree of diversification to ensure they remain appropriate."
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For further information please contact:
Colin Mayes Marina Jane Sanchez
Aon Hewitt CNC Communications
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