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The Actuary The magazine of the Institute & Faculty of Actuaries

Accounting deficit hides reality for pension trustees

The collective final salary pension accounting deficit of the UK's FTSE 350 companies is currently around £40bn - the same level it has been at for most of 2011. However, buyout liabilities for the FTSE 350, the cost of transferring current and future liabilities to insurers, are now at the highest level they have ever been, having increased by over 30% in the last eight months from £650bn in February to £850bn today.

Commenting on the results, principal consultant at Aon Hewitt, John Belgrove, said: "The scrutiny placed on accounting measures is masking the economic reality that pension schemes face as buyout costs have ballooned to record levels. While AA bond related funding levels have been moderately stable this year, the downward pressure on gilt yields has pushed up both funding and buyout liabilities. Even in a favourable investment climate few asset portfolios would be able to keep pace with this rise. The consequence is that deficit recovery plans and end-game solutions are even further set back."

Despite the current difficult conditions, a recent Aon Hewitt survey of global pension risk service providers and pension plan sponsors revealed that schemes in the UK makes greater use of sophisticated de-risking tolls, on both the asset and liability side, such as inflation, interest an longevity swaps.

Paul McGlone, of Aon Hewitt explained: "It is encouraging to see that UK trustees are responding to the challenge and are leading the way on pension risk management. While the buyout market is still relevant for some schemes, particularly those with assets that are already matched to their liabilities, buy-out exercises are particularly challenging at present. Schemes are having to consider other methods to make progress towards their targets, and sponsors and trustees need to keep the foot hard on the pedal looking at all solutions. Sponsors and trustees should keep all options on the table as they work to close their deficits, whether it is contingent assets, triggers to take risk off when conditions renormalise, longevity, hedging, general de-risking, diversification or asset dynamism."

As a result of the current situation, Aon Hewitt also expects to see continued high levels of interest from sponsors for liability management exercises, including enhanced transfer value exercises and pension increase exchange exercises, under which pensions with future increases are exchanged for higher level pensions.