GLOBAL - Company-run pension plans in the UK are four times more likely to fall short on meeting future liabilities than their US counterparts, according to new research by Aon Consulting.
The survey estimates that only 5% of UK occupational pension plans are fully funded compared to 20% of US employer-run pension plans for year-end 2004.
The research found that on average, the pension plan deficit of a US company represents around two months worth of profits (before tax), compared to seven months for UK companies. In addition, about 25% of UK companies have pension plans with a defiict representing more than two years worth of profits, while less than 5% of US companies are in the same position.
According to Aon, UK companies have not increased their level of contributions to the same extent as their US counterparts. US companies put cash contributions of more than 10% of plan assets into plans over the last two years (US$90bn) compared with only 7% for UK companies (£25bn).
Commenting on the findings, Andrew Claringbold, Aon Consulting in the UK, said the fall in bond yields had hit the UK harder than the US.
“This is because benefits for most leavers and retirees in the UK have to be increased each year in line with the retail price index,” he said. “Therefore, the amount of money required in the pension plan to meet these benefits is more susceptible to longer-term interest rates. This is not a standard pension requirement in the US.”
At the end of 2004, Aon found pension plans of US companies were 91% funded on FAS87 assumptions, compared with 85% funded for UK companies based on FRS17 assumptions.
Brad Klinck of Aon Consulting in the US said: “Even though most large US plans are well funded, a significant number have recently looked to address funding concerns by making contributions well in excess of their minimum required contribution levels, increasing the funded status both of those specific plans, and of the group as a whole.”
Claringbold said the Pensions Act 2004 would give trustees more power in setting company contributions and that the Pension Protection Fund (PPF) levy should incentivise companies to have better funded plans.
Klinck said discussions surrounding changes to both US funding and accounting rules (FAS87) were currently taking place, with concerns regarding the Pension Benefit Guaranty Corporation’s funded status and convergence with global accounting standards for much of the analysis on the funding and FAS sides respectively.
Aon’s survey compared US and UK companies with total pension assets of around US$800bn and £350bn respectively.
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