Pensions deficits increase by 50% in four years

Pension deficits remain stable during November
Aon Hewitt says that the shift from RPI to CPI could result in a decrease of up to £35 billion in pension deficits as recorded by the Aon Hewitt 200 index



LONDON, The accounting deficit of the 200 largest privately sponsored pension schemes remained relatively stable during November, increasing by £2bn to £71bn at the end of the month according to the latest Aon Hewitt 200 Index. If this pattern continues into December, this year will have seen the most stability in pension scheme funding levels since 2006, says the the global human resource consulting and outsourcing business of Aon Corporation (NYSE:AON).

Although stability in the balance sheet may be welcomed, many employers will be hoping for further improvements in their accounts before conditions stabilise. The typical accounting deficit for defined benefit schemes has increased by around 50%, an average deficit of 55bn in 2006 to an average deficit of 87bn in 2010*, a tangible sign of the impact that these arrangements are having on employers.

The impact of the financial crisis caused market conditions to become volatile which has resulted in large swings in pension scheme deficits, according to Aon Hewitt. Material movements in the funding level from one month to the next are unpopular with employers because of the difficulty they cause in predicting what the end of year pensions balance sheet might show.

With Government proposals to link private pension payments to the Consumer Prices Index (CPI) rather than the Retail Prices Index (RPI) expected to be confirmed in the coming days, many companies will be integrating that change into their accounts for the first time this month. Aon Hewitt believes that this could result in a reduction of £35 billion to the deficit of the Aon Hewitt 200 pension schemes. However, the precise impact of this will only be understood as companies file accounts.

Commenting on the latest figures, Sarah Abraham, consultant and actuary at Aon Hewitt, said: “In the aftermath of the financial crisis, pension deficits crept up to record highs. For example, in mid-June 2010, the deficit reached its highest level of £112bn. In recent months, deficits have started to reduce, although this trend appears to have stalled. Stability is a good thing for any company trying to get a handle on the size of its pension scheme obligations, however, many employers will have been relying on further market recovery to recoup some of the losses incurred in recent years.

“If conditions during 2011 remain relatively stable, then we would expect employers to take the opportunity to better understand the current state of their pension schemes and how they might be best managed in the future. With cashflow constraints also having relaxed for many employers, risk reduction is likely to be a key consideration for many companies next year.

“Depending on regulation and how it is approached by companies and trustees, and as a result of the shift from RPI to CPI, we predict a decrease of up to £35 billion to the Aon Hewitt 200 deficit. This is large enough to make a dent in the deficit of the Aon Hewitt 200, but is nowhere near enough to wipe out the aggregate deficit and send it into surplus"


Date - Total surplus (deficit) under FRS17/IAS19 in £ Aon Hewitt 200 billions


31 January 2009 - (29.3)
28 February 2009 - (44.8)
31 March 2009 - (35.9)
30 April 2009 - (7.6)
31 May 2009 - (40.1)
30 June 2009 - (73.3)
31 July 2009 - (72.8)
31 August 2009 - (78.0)
30 September 2009 - (61.9)
31 October 2009 - (73.5)
30 November 2009 - (78)
31 December 2009 - (88)
31 January 2010 - (97.0)
28 February 2010 - (93.7)
31 March 2010 - (94)
30 April 2010 - (97.2)
31 May 2010 - (88)
30 June 2010 - (100)
31 July 2010 - (74)
31 August 2010 - (97)
30 September 2010 - (80)
31 October 2010 - (69)
30 November 2010 - (71)


About Aon Hewitt
Aon Hewitt is the global leader in human capital consulting and outsourcing solutions. The company partners with organisations to solve their most complex benefits, talent and related financial challenges, and improve business performance. Aon Hewitt designs, implements, communicates and administers a wide range of human capital, retirement, investment management, health care, compensation and talent management strategies. With more than 29,000 professionals in 90 countries, Aon Hewitt makes the world a better place to work for clients and their employees. For more information on Aon Hewitt, please visit www.aonhewitt.com.

About Aon
Aon Corporation (NYSE:AON) is the leading global provider of risk management services, insurance and reinsurance brokerage, and human capital solutions and outsourcing. Through its more than 59,000 colleagues worldwide, Aon unites to deliver distinctive client value via innovative and effective risk management and workforce productivity solutions. Aon’s industry-leading global resources and technical expertise are delivered locally in over 120 countries. Named the world’s best broker by Euromoney magazine’s 2008, 2009 and 2010 Insurance Survey, Aon also ranked highest on Business Insurance’s listing of the world’s insurance brokers based on commercial retail, wholesale, reinsurance and personal lines brokerage revenues in 2008 and 2009. A.M. Best deemed Aon the number one insurance broker based on revenues in 2007, 2008 and 2009, and Aon was voted best insurance intermediary 2007-2010, best reinsurance intermediary 2006-2010, best captives manager 2009-2010, and best employee benefits consulting firm 2007-2009 by the readers of Business Insurance.