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The Actuary The magazine of the Institute & Faculty of Actuaries

FTSE 100 pension schemes miss chance to de-risk

Most FTSE 100 pension schemes have failed to grasp the opportunity to de-risk despite significant improvements in aggregate funding deficit of over the last eight months, according to a report by PensionsFirst, the risk analytics and reporting software provider.

The PF Risk Report shows that assets held by FTSE 100 DB schemes increased by £29 billion while liabilities fell by £25 billion, resulting in a net reduction in the proxy funding deficit of £54 billion. The deficit now stands at £80 billion.

However, the value-at-risk (VAR) for the FTSE 100 has fallen very little (from £30.54 billion to £30.19 billion) since August 2010 - a relatively small amount in comparison to deficit improvements and the firm says the vast majority of schemes have not taken the opportunity to ’lock in’ improvements in funding levels by removing risk.

PensionsFirst Analytics CEO, Benjamin Reid commented: "The improvement in funding levels over the previous eight months has been a huge benefit to pension schemes. To put this figure in perspective, the improvement in the deficit outweighs the total dividends paid out by the FTSE 100 over the same period. Many pension schemes were in a similarly favourable funding position back in 2008 but failed to take the opportunity to reduce risk and subsequently slipped back into deficit when the financial crisis hit. It is worrying to think that many are leaving themselves open to this happening again."

PensionsFirst said this was of primary concern as schemes approached their triennial valuation, noting that these can often take a year to be signed off, with the VAR over this period standing at more than £100bn [at a 1-in-20 VAR confidence level”. A widening in the deficit of such a magnitude would result in FTSE100 companies having to make approximately £10bn of increased cash contributions into their schemes each year with major P&L implications, the firm said.

Andrew Morris, assistant vice president of client solutions adds: "Despite April 2011 looking like a fortuitous date for a triennial valuation, there is a chance that firms may see deficits more than double over the next 12 months if de-risking takes a back seat while trustees and corporates go through the onerous valuation process. Given that deficit swings over that period could have economic implications for schemes for the following three years, it is imperative that they do not take their eye off the ball."