LONDON, 03 March 2008 – Despite improved reported funding levels, February was a bleak month for the future of final salary pension provision, according to Aon Consulting, a leading pension, benefits and HR consulting firm.

The Aon200 Index, which tracks the surplus (or deficit) of the 200 largest UK privately-sponsored pension final salary schemes, improved from a deficit of £12 billion at the end of January 2008, to an all time high surplus of £21 billion at the end of February. Over half (62 per cent) of schemes are now in surplus, representing a significant month on month improvement.  

However, proposals by the Accounting Standards Board (ASB) [1] and a mortality assumption consultation from The Pensions Regulator (TPR) [2] threaten the future of scheme funding levels. To illustrate the potential damage of these plans, February’s actual surplus of £21 billion would fall to a deficit of around £180 billion if the data were recalculated (as measured by the Aon200 Index) to take into account the combined effect of the ASB and TPR proposals. Few, if any, schemes would be in surplus,

The ASB has proposed that companies should be required to record pension deficits in their company accounts related to risk-free rates, which would add approximately £120 billion to the Aon200 Index of deficits.

Separately, TPR has proposed a considerably more prudent mortality assumption for funding purposes than those currently used by UK companies.  If companies were also to adopt these new assumptions, then the impact would be to raise life expectancy assumptions for new pensioners retiring at age 65 from around 85 to 90, thereby adding over £75 billion to reported liabilities. This figure, combined with the impact of the ASB proposals, represents an addition of almost £200 billion to scheme liabilities.

The main reason for the improvement in the month-on-month funding levels is the continued widening of the AA credit spread following credit crunch.  AA Corporate bond yields, the benchmark measure for pension scheme liabilities, have reached a seven-year high.

Commenting on the latest figures, Marcus Hurd, senior consultant and actuary at Aon Consulting, said: “There are two sides to the final salary story in February: on the positive side, after record falls in January, schemes have recovered to record levels of surplus. However, the double whammy of ASB proposals and the Regulator’s proposed mortality assumptions throw the future of final salary schemes into further doubt.

“These proposals add more pressure on companies to close their final salary schemes to members or find ways to terminate their liabilities. Tomorrow’s generation of pensioners are being required to take pensions risk themselves, whereas many companies had historically agreed to shoulder the responsibility.  The current pensions environment punishes companies for demonstrating paternalism to their employees.  The future of the UK pensions industry would be best served by encouragement rather than regulation or interference.

“Continued uncertainty over the future of final salary pensions means it is likely that company sponsors will increasingly look towards the various forms of settling or managing their pension liabilities, especially as the cost of doing so is falling.”

Footnotes:

[1] On 31 January 2008, the ASB issued The Financial Reporting of Pensions: a Discussion Paper on future directions.

[1] On 18 February 2008, TPR published a draft statement on the regulation of defined benefit pension schemes that sets out a new approach to looking at mortality assumptions.

 Ends

For more information contact:

Susie Patterson / Leo Wood

0207 269 7233 / 137

susie.patterson@fd.com / leo.wood@fd.com

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, one of the UK’s largest insurance brokers and providers of risk management services and a major force in reinsurance and the UK human capital consulting market.  Aon Consulting Limited is authorised and regulated by the Financial Services Authority.

About Aon

Aon Corporation (NYSE:AOC) is the leading global provider of risk management services, insurance and reinsurance brokerage, human capital and management consulting, and specialty insurance underwriting. Through its 43,000 professionals worldwide, Aon readily delivers distinctive client value via innovative and effective risk management and workforce productivity solutions. Our industry-leading global resources, technical expertise and industry knowledge are delivered locally through more than 500 offices in more than 120 countries. Aon was ranked by A.M. Best as the number one global insurance brokerage in 2007 based on brokerage revenues, and voted best insurance intermediary, best reinsurance intermediary, and best employee benefits consulting firm in 2007 by the readers of Business Insurance. For more information on Aon, log onto www.aon.com.

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