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The Actuary The magazine of the Institute & Faculty of Actuaries

'Illusory calm' for UK corporate pensions deficits

This is in direct contract to the previous month’s fortunes, as the outlook for price inflation has eased back and corporate bond yields have tightened up again. Short-term fears in equity markets have been appeased by the news that parties are working together on the US debt ceiling.

Hugh Creasy, director, Xafinity Corporate Solutions, said: “Corporate sponsors have been fortunate so far this year. Each month we have seen tension rise in one area, but see it smoothed away by easing markets elsewhere. The net effect has been one of illusory calm.

“Whether we like it or not, corporate balance sheets hang on a snapshot of corporate bond yields and the outlook for price inflation. Neither has been stable, yet each has managed to keep the other in check throughout 2011. This is not something sponsors can count on — as history has shown us.

“Helpful as the resilience in equity markets has been, gradual de-risking from equities has reduced corporate sponsors’ exposure to equity prices. The real threat lies in financial markets and their impact on pricing the pension promise. As an indicator, the Xafinity model shows that a 0.25% shift in inflation would kick the deficit up by £70 billion. It would take a fall in the FTSE of 700 points to achieve the same impact. While we cannot be so blasé as to dismiss such a fall in equity prices, a 0.25% shift in the outlook for price inflation is not at all unusual.”

XafinityThe Xafinity Consulting model draws on the Pensions Regulator's November 2010 edition of the Purple Book, and covers 99% of the UK's PPF-eligible DB schemes and 12 million members.