Aggregate pension deficits for the FTSE-100 companies appear to have been wiped out during September, as a result of turmoil in the financial markets.
According to estimates made by Watson Wyatt after the London market closed on 30 September, the £12 billion deficit which existed at the beginning of the month, had turned into a surplus of £30billion by the end of the month.
Pension Capital Strategies’ analysis of FTSE-100 pension schemes to the end of the third quarter of the year identified a similar trend. It estimated a total surplus among FTSE-100 schemes of £18 billion at 30 September, compared with a deficit of £8 billion at the end of June.
However, both companies said that the turnaround could be attributed to accountancy quirks.
John Bull, head of defined benefit consulting at Watson Wyatt, said “It may seem counterintuitive to have what appears to be good news about pensions in a month of such financial drama. But it isn’t just share prices that affect the surpluses and deficits that companies have to disclose on their balance sheets. During the month, expected future inflation as implied by gilt yields has fallen, reducing the projected payments that pension funds will need to make in future. Furthermore, because AA corporate bond yields are used to convert a stream of projected payments into a single liability number, significantly higher AA corporate bond yields have made these liabilities appear smaller.”
Chris Cowling, of Pension Capital Strategies, said:”The fact that AA bonds of banks and other financial institutions have fallen sharply is not a good reason to regard your pension liabilities as suddenly being a lot lower. It is just a quirk of the accounting rules that is hiding the problems that many pension schemes currently face.
“It has been a very difficult year time for pension schemes. In the last year we have seen one of the largest ever shifts by pension schemes into lower-risk investments (bonds now make up 40% of pension scheme assets and that percentage is rising). But much of the good risk management that has been done by companies and trustees is being undone by these dramatic markets.”