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The Actuary The magazine of the Institute & Faculty of Actuaries

Plunging gilt yields prompt record FTSE350 pension liabilities

The Aon Hewitt 350 index showed an increase in the collective final salary pensions accounting deficit of the UK's FTSE 350 companies of 13.2%, up from £53 billion to £60 billion.

And the collective buyout deficit increased by more, from £400 billion to £435 billion.

Kevin Wesbroom, managing principal at Aon Hewitt (pictured), said the cost of pension scheme liabilities had rocketed since January.

"This is the largest increase in liabilities for almost 15 years and leaves the cost of pensions at the highest level we have ever seen," he said.

"Yields are now the lowest we have experienced in recent history, in fact yields on index-linked bonds, net of inflation, are now negative. That means that these investments are guaranteed to fail to keep pace with index-linked liabilities."

Paul McGlone, principal and actuary at Aon Hewitt pointed out that, while the cost of pensions has risen dramatically, the value of liabilities in company accounts has increased by less, as these are calculated in reference to the corporate bond market.

"For each £100 million of liabilities at the start of 2011, company accounts will now be showing around £110 million, while funding valuations will be showing £130 million of liabilities. That could prompt some very difficult discussions between plan sponsors and trustees.

Mr McGlone also warned that the collapse in yields meant buyouts and buy-ins were becoming less affordable, with premiums soaring.

"While schemes in specific circumstances are still using the buyout/buy-in market, for many schemes the increases in liabilities has reinforced the fact that they are many years away from being able to secure their liabilities," he said.

As a result, Mr McGlone believes there will be a greater emphasis on unfunded solutions such as longevity swaps in the coming year, similar to the recent Rolls-Royce deal, or other liability management exercises.