Deficits continue to increase

Apr 26, 2010

Actuaries at BBS expect year-end company accounts to show increased pension scheme deficits - potentially hindering the ability of the UK economy to move out of recession.

"Double Whammy" hits liabilities

The funding valuations that appear in Company Accounts (under the accounting standard known as FRS17) are calculated with reference to the yield available on good-quality corporate bonds.  As the pressures of the credit-crunch have reduced - these yields have fallen back from around 6.75% (a year ago) to around 5.5% now.

At the same time, the expectation for long-term inflation has gradually climbed from around 3.0% to 3.75%.  This pushes up the level of future benefits, which, of course, also has further cost implications.

Nick Davis, Senior Actuary, says that "I expect that scheme liabilities under FRS17 will have increased by between 45% (for mature schemes) to 65% (for immature schemes) simply because of these changes to market conditions."

Positive Investment Returns

However, it is important not to look at rising liabilities in isolation, as most pension schemes will have seen their investments rise steadily over the year, with typical increases being:

• Equities - a 50% rise;
• Corporate Bonds - a 20% rise;
• Index-Linked Gilts - a 10% rise;
• Fixed Income Gilts - have remained steady

Nick confirms that "your typical pension scheme with a balanced portfolio may have benefited from a 30% to 35% rise in its investments.

"It is quite evident, however, that the overall effect on scheme funding will be a deterioration of about 10% to 20% in funding over the year."

Nationwide Impact

BBS estimates that the total cost to UK pension funds could be to add a further £250 billion to deficits - a figure that under FRS17 comes straight off the balance sheet.

Nick confirms that "whilst most people recognise that the disclosed funding levels under FRS17 are calculated on a standardised basis that might show little correlation with the real world, the numbers do highlight the pressure that our major companies are under and support the move away from defined-benefit pension provision.

"At best, companies are going to find it harder to borrow on competitive terms, in order to make the investment that will be needed to see us out of recession.  Not the news that the Government wants to hear shortly before it goes to the electorate."