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The Actuary The magazine of the Institute & Faculty of Actuaries

Change in fortune for UK pension scheme deficits

The collective final salary pensions accounting deficit of the UK’s FTSE 350 companies has fallen to £41bn during the last 12 months, according to figures released today by Aon Hewitt.

The Aon Hewitt 350 index, which looks at privately sponsored defined benefit (DB) schemes in the UK, indicated that UK schemes moved significantly closer to being fully funded, when compared with the collective deficit of £66bn at the end of April 2010.

Marcus Hurd, principal and actuary at Aon Hewitt, commented: "It’s a significant change in fortune, particularly compared to August last year when the deficit peaked at over £100 billion. This move to more positive territory reflects strong equity market performance while liability values are broadly where they were a year ago. However, pension schemes are not yet out of the woods. While the funding status of the UK’s largest pension schemes now looks much more manageable, the overall position is still one of deficit."

Aon Hewitt highlighted investment market volatility as a key consideration for UK pension schemes. Over the past 12 months, UK equity performance has fluctuated by 25%, from a low of around 4,800 to current highs of over 6,000, while UK AA corporate bond yields ranged from 4.8% to 5.7%.

John Belgrove, principal investment consultant at Aon Hewitt, said: "Now is a suitable time for pension schemes to take stock and to recalibrate their strategy as trustees and companies continue to grapple with challenging long term objectives. Having been right last year to advise schemes to wait for better opportunities to de-risk further, we think now is a good time to bank some of these gains."