London: 9 November 2004 - Recent equity market improvements have failed to reduce FTSE 100 overall pension deficits, but 2004 year-end is expected to herald an improvement in the current shortfall, according to updated analysis by Aon Consulting based on consensus bond and equity market forecasts from leading City investment institutions¹. 

Aon Consulting reveals that despite equity markets rising by 3% over the 3 months to 30 September 2004, the overall pensions deficit for UK companies has increased by £8bn (£52bn to £60bn), largely due to the fall in long-dated index linked gilt yields by 0.16% over this time period.       

Andrew Claringbold, Principal at Aon Consulting, said: "Despite equity markets reaching their highest levels for 27 months, the increase in the assets has been more than offset by an increase in liabilities as a result of the fall in long-term interest rates.  Pension scheme assets have increased by 3% but pension scheme liabilities have increased by 4.5%.  The term of the pension scheme liabilities is so long that the liabilities are very sensitive to movements in long-dated bond gilt yields.”

Whilst the news has not been favourable over the last 3 months, expectations for the future are better.  Updating analysis released in September 2004 to take into account the latest investment bank estimates, Aon Consulting research suggests that the current UK company pensions deficit could be reduced by a third – from £60bn to £41bn – by 31 December 2004.  This is based on the consensus view among the City institutions surveyed that the FTSE100 will rise to 4650 points and corporate bond yields will edge up to 5.9%. 

If the more optimistic City forecasts are believed and corporate bond yields rise to 6.2% and the FTSE100 hits 5100 by the end of September 2005, Aon Consulting predicts that the current overall pensions deficit for UK companies will fall to as little as £5bn.

 

 

 

 

 

Andrew Claringbold added: "Our analysis indicates that the FRS17 deficit has had a roller coaster ride over the last year despite the fact that equity markets have remained fairly stable. The deficit has ranged from £76bn at the end of September 2003, to around £52bn during May and June 2004.  These movements have been driven largely by index linked gilt yield improvements.  Over the year, real long-term interest rates have ranged from around 1.7% to 2.2% and only a 0.5% change in the interest rates will cause a 10% movement in the pension scheme liabilities.  Equities have also traded within around a 10% range over the last year, but since pension schemes now hold on average only 60% of their funds in equities, this impact has not been as significant.”

Yakoub Yakoubov, Aon Consulting's Head of Quantitative Strategies said: “ The results demonstrate that if forecasts were borne out in practice, the asset liability mismatch would reduce the deficit level significantly due to the assets growth exceeding growth in liabilities.  The recovery in corporate profitability and the forecasted bond yields still being at the lower end of their historic ranges indicate that such a mismatch position would benefit the pension schemes.  The results also highlight that the level of real long-term interest rates is of great importance and any upward movements will significantly ease the pension burden.  However, each individual scheme needs to be aware of the fact that high exposure to equities brings with it a significant level of risk, especially if short term solvency is of paramount importance.”

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note to Editors:

1.The survey was conducted amongst the 12 leading City institutions that made public their views of the investment markets.  These companies are: ABN Amro, Citigroup Smith Barney, CSFB, Deutsche Bank, Goldman Sachs, HSBC Securities, LGIM, JP Morgan, Merrill Lynch, Morgan Stanley, UBS, Media (ex LGIM)



About Aon Consulting

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aon Consulting is a leading human capital consultancy, helping organisations of every size to attract and keep the employees they need. We advise on all aspects of employment, including health-related insurance and risk; employee compensation and pensions; human resource strategy planning; job design and change management; and staff assessment and legal issues.  Aon Consulting is a division of Aon, the UK’s largest insurance broker and provider of risk management services, a major force in reinsurance and the UK human capital consulting market.  Aon Consulting Limited is authorised and regulated by the Financial Services Authority.

This press release may contain certain statements relating to future results, which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from either historical or anticipated results, depending on a variety of factors. Potential factors that could impact results include the general economic conditions in different countries around the world, fluctuations in global equity and fixed income markets, exchange rates, rating agency actions, pension funding, changes in commercial property and casualty markets and commercial premium rates, the competitive environment, the actual cost of resolution of contingent liabilities and other loss contingencies, the ultimate impact of the business transformation plan, and the timing and resolution of related insurance and reinsurance issues relating to the events of September 11, 2001.

Further information concerning the Company and its business, including factors that potentially could materially affect the Company's financial results, are contained in the Company's filings with the Securities and Exchange Commission.

 

 

Aon Limited is authorised and regulated by the Financial Services Authority in respect of insurance mediation activities only.