Private sector final salary liabilities hit £1.2 trillion
Pension liabilities hit new high
Aon200 deficit increases to £97bn with liabilities of £608bn
Market conditions for pension schemes “tougher than they have ever been”
LONDON - Pension liabilities for UK private sector final salary pension schemes have hit the £1.2 trillion (£1,200,000,000,000) landmark as market conditions continue to deteriorate for UK final salary pension schemes. The Aon200 index, which tracks approximately half of the UK’s private sector pension scheme liabilities shows liabilities of £608bn with assets making modest gains, but falling short by £97bn. Market conditions have never been tougher, according to Aon Consulting, the leading employee benefits and risk management firm.
The total private sector final salary pension liability of £1.2tn is a 20% increase since the landmark £1tn figure was hit in August 2009.
The main cause of the increased value placed on the schemes’ liability is the fall in the yield available on government securities. The lower yields are a product of the weak and slowing world economy, very loose monetary policy as credit conditions remain tight, and the flight to safety effect from abroad due to problems in the euro-zone.
The government bond yield is used as a benchmark for assessing pension scheme liabilities. The 20 year government gilt yield has dropped to 3.76%, a level at which it has only been once before (March 2009) during the last ten years. During March 2009, however, the impact was softened by wide AA credit spreads (over 2.5% compared to 1.1% now), whereas the full impact of the tough government yield is now reflected in pension scheme liabilities.
Those schemes who have matched liability exposure by investing a substantial proportion of their assets in government securities and swaps will have protected themselves from the recent deterioration in market conditions, but the large majority of schemes still remain exposed. The current market conditions act as a timely reminder to pension scheme stakeholders of the need to de-risk when the opportunity arises.
The Aon200 deficit of £97bn at 31 August 2010 compares to £74bn at the end of July 2010 and £78bn at the end of August 2009.
Commenting on the latest figures, Marcus Hurd, head of corporate solutions at Aon Consulting, said: “Market conditions have never been as tough as they are today for final salary pension schemes. The value placed on pension scheme liabilities has now hit an unprecedented £1.2tn. Traditional scheme investment strategies are struggling to keep pace in rapidly moving markets.
“It’s only a year ago since we balked at the landmark £1tn figure, but the woes just continue to mount. Pension scheme liabilities at this level pose a significant financial risk to UK businesses at a time when there are real fears that market conditions could deteriorate further. Rapidly moving markets emphasise the need for adaptable investment strategies and the need to reduce risk where possible when the opportunity arises.”
About Aon Consulting
Aon Consulting is among the top global human capital consulting firms, with more than 6,300 professionals in 229 offices worldwide. The firm works with organisations to improve business performance and shape the workplace of the future through employee benefits, talent management and rewards strategies and solutions. Aon Consulting was named the best employee benefit consulting firm by the readers of Business Insurance magazine in 2006, 2007, 2008 and 2009. For more information on Aon Consulting, please visit http://www.aon.com/human-capital-consulting.
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