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The Actuary The magazine of the Institute & Faculty of Actuaries

European sovereign default threat to DB deficits

European default on sovereign debt could cause a 45% spike in defined benefit pension scheme deficits, costing sponsors an extra £190bn, pension risk experts warn.

Failure by Eurozone countries such as Greece to pay government debt could see gilt yields plunge 30 basis points and equity markets drop 20%, leading to a new financial crisis in proportion to the credit crunch, Pension Insurance Corporation say.

The firm says trustees should review their exposure to sovereign debt to contain any deficit spikes and limit the hit to sponsoring employers.


PIC co-head of business origination David Collinson (pictured) said: "Trustees should consider how long equity markets can continue to rise, especially given the red lights flashing in the fixed income markets and perhaps review what they might have done during the summer of 2007 with the benefit of hindsight.

"We estimate that deficits could be pushed out by 40% following a sovereign default, a situation which is not beneficial for trustees, sponsors or pension fund members."

PIC said pension insurance was at its most affordable since the summer of 2008 - just weeks before the collapse of investment bank Lehman Brothers sent shockwaves through capital markets.

"The clear divergence in market outlook between the fixed income markets and the equity markets should be of concern to trustees," Collinson said.

"We saw the same thing in summer 2007 and 18 months later, in March 2009, pension fund deficits had widened significantly due to plunging asset markets and volatile liabilities."

Last week, EU leaders agreed the terms of a bail out package to salvage the sovereign debt crisis threatening to tear down the single currency.