Volatility continues to challenge UK pension schemes

Pensionere counting coinsThe funding deficit for final salary pension schemes at FTSE 350 companies swung from a low of £27bn (€31bn) to a high of £45bn during July, as volatility in the equity and bond markets caused assets to fluctuate in value.

These large swings continue to challenge trustees as they try to plan asset allocations that will provide sufficient returns to meet their members' needs. However, the human resource consultancy Aon Hewitt, which produced the figures, says these swings can be an opportunity for schemes to “lock in” good performance while de-risking their portfolios.

The firm estimates that a fifth of pension schemes now use triggers, which prompt trustees to buy or sell assets once they reach a certain price. Aon Hewitt has also observed that schemes are using increasingly sophisticated trigger strategies, which make calculations based on a combination of a scheme's funding level, growth assets and bond yields. The firm says the majority of these strategies have been introduced in the last two to three years.

“While swings in funding level are challenging, they can offer opportunities for schemes to reduce their deficits,” said Marcus Hurd, principal and actuary at Aon Hewitt. “Schemes can use these swings, whether caused by changes in asset or liability values, to de-risk. They can lock in the improvements to funding levels through reductions in allocations to higher risk assets and greater hedging.”

The figures come from the Aon Hewitt 350 index, which tracks the aggregate final salary pension scheme deficit for the FTSE 350 companies. The deficit ended the month at £38bn, down from £44bn at the end of June.

Though volatility of the funding deficit is a concern for trustees, the past year has seen a welcome development for those managing UK schemes – the shift from the RPI to the CPI index. Because the CPI index gives a lower estimate of inflation, many schemes have seen their liabilities slashed at a stroke. BT has seen its liabilities decline by £3.5bn in its 2011 accounts, for instance.

This comes at the expense of members' payments, and some fear that CPI-adjusted pensions will fail to keep up with the real pace of inflation.

©2011 funds europe