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UK pension deficits virtually unchanged in a decade

Money icebergPension scheme deficits in the UK's FTSE 350 companies have 'virtually unchanged' in the past ten years, despite a high level of company contributions to reduce them.

The latest recorded deficit of £73 billion (€91.7 billion) remains unchanged, despite an estimated £175 billion of deficit contributions paid by companies, Mercer, a pensions consultancy, found.

The figures illustrate the impact of falling bond yields, equity underperformance and rising longevity over the past ten years.

Funding levels shown in company accounts have improved by around eight percentage points, from 79% at December 31, 2002, to 87% at June 30, 2012.

However, the estimated £175 billion of deficit contributions is equal to 40% of the average asset value of the pension schemes. 

Mercer also found that market volatility had caused deficits to oscillate from lows of £43 billion in 2007 to highs of £103 billion in 2009.

According to the consultancy, the volatility suggested the risk/return position adopted by many companies in conjunction with their schemes’ trustees had not paid off, leaving company balance sheets, and potentially scheme members, vulnerable to external events.

Many companies are now much more active in managing this risk in light of changes in market conditions, however.

Adrian Hartshorn, partner in Mercer’s financial strategy group, said: “Defined benefit pension risk management has improved over the decade but we remain concerned over the risk that defined benefit pension schemes continue to pose to UK companies.

“Companies need to make active decisions about the trade-off between locking into more certain, known costs [or] continuing to take risks that may or may not pay off.”

Many schemes have adopted de-risking strategies, but many others remained invested in riskier assets, said Hartshorn.

©2012 funds europe