Pension deficits fall in favourable investment climate


The pension fund deficits of the UK's largest listed companies have fallen to their second lowest level in the last four years thanks to a favourable investment climate and strong rises in the stock market.

Figures from consultants Watson Wyatt have found that the combination of rising share markets and rising bond yields have reduced the pension deficits of FTSE 100 companies from £50 billion at the beginning of October to £42 billion by the end of the month.

"Only at the end of April this year have deficits been smaller in the last four years." said Stephen Yeo, a senior consultant at Watson Wyatt.

"Shares are now above the level they were then, but bond yields, which are used to determine liabilities under IAS19, are still below their recent peak."

The figures are based on the IAS19/FRS17 accounting basis that is used by the UK Pensions Regulator as one of the triggers for further investigation of pension scheme funding in order to prioritise its workload under the new scheme-specific funding regime.

Those schemes that are not expected to be fully funded on this measure by the end of a recovery period, typically no longer than ten years, will be required to supply further information to the Regulator.

"Even though scheme funding is improving, early evidence from the new funding regime is that although funding targets are being increased many trustees and companies are agreeing targets that fall short of the full IAS19 reserve," Stephen Yeo added.

"In general this is by making an allowance for equities, and other return-seeking assets, to outperform bonds when setting the funding target. This is in line with guidance from the Regulator supporting a scheme-specific approach, taking account of scheme maturity and the strength of the employer covenant."