Many companies are likely to review buying annuities for pensioners due to the continuing credit crunch and the volatility of investment markets.
According to the Aon200 Index, the aggregate pension scheme surplus has risen by 141% to a surplus of £11bn at the end of March 2008, from a deficit of £27bn a year ago.
The impact of market falls on pensions has been cushioned by the rise in AA corporate bond yields to a five-year high of almost 7% according to the report.
Because corporate bond yields have increased, the cost of pension buyouts is now more attractive to companies than it has been in the past. The cost of buyout for pensioners has fallen by 10-15% and for deferred pensioners the cost has fallen by as much as a quarter. This means that for many schemes the current cost of buying out pensioner liabilities could be close to or below the liability of the scheme’s funding basis.
Marcus Hurd, senior consultant and actuary at Aon Consulting, said: “Over the last few years, a wide range of financial management techniques have been developed to help companies manage scheme risk. The panacea for many companies has, however, been to extinguish pension scheme liabilities by passing them to insurers at a reasonable price.
“It remains to be seen if the insurance market conditions will persist of if this will be remembered as a short window of opportunity. Most companies should review pensioner buy-out as a serious option in the current financial climate.”