UK - Rising equity markets have slashed scheme deficits at Britain's largest companies by over 50% to £50bn, new research shows.
But experts warn the improvement could trigger a new round of defined benefit scheme closures as firms “free themselves from the risks” for a tolerable one-off payment.
Hewitt Bacon & Woodrow says the aggregate FRS17 deficit for FTSE100 company schemes has fallen from £100bn – registered when the market hit its lowest point during March 2003 – to just under £50bn by the end of December.
But Hewitt partner Kevin Wesbroom (pictured) warned that these gains could easily be reversed if markets fell again and that increased longevity would add to schemes’ liabilities.
Wesbroom said: “There is some good news, but don’t think that we’re out of the woods.
“We don’t know the effect that schemes progressively switching to bonds will have in terms of increasing liabilities or the extent to which people have taken on board the latest changes in mortality that the Government Actuary has come out with.”
Mercer Investment Consulting head of investment strategy Andy Green doubted the scale of the recovery.
He said: “The positive returns on equity markets over the last 12 months will have been generally beneficial to pension plan funding levels.“But corporate bonds, which are used to determine the value of liabilities under FRS17, also delivered positive returns over 2003, and the market implied expected rate of inflation has risen over the year.”
And Friends Provident manager, pensions research and development, Chris Bellers, warned that if markets continued to improve and restore funding levels, many companies could move to wind up their defined benefit schemes in order to “free themselves” from the risks that they posed.
FPS group marketing manager Patrick Wynne-Jones agreed. He said:
“We’ve been talking to a lot of people with deficits and if it gets to the point where they can make a one-off payment that’s tolerable to clear the decks, that’s what they’re going to do.”
The secretary of state for work and pensions has told MPs clawback and avoidance measures could be imposed for the people responsible for driving Carillion over the cliff.
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Defined benefit (DB) schemes could have an aggregate surplus by 2021 under Pension Protection Fund (PPF) projections, its strategic plan for 2018 to 2021 reveals.
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