UK - Pension deficits for FTSE 100 companies stood at £63bn at the end of February despite the recent price rises in equity markets, according to Watson Wyatt.
The firm’s estimate of the aggregate deficit for the FTSE 100 companies is up from £61.5bn at the end of January. The estimates assume that contributions paid into pension schemes by UK employers in 2004 were largely unchanged from the previous year, Watson Wyatt said.
“While the rise in equity prices in February increased assets by about £3bn, the continuing increase in inflationary expectations coupled with a marginal decline in corporate bond yields also increased liabilities, leaving the net position a little worse,” commented Chinu Patel, a partner at the firm.
“So the fact that equities have been going up does not necessarily mean that pension deficits are any less pressing in their importance.”
Watson Wyatt has launched an online software tool, the Pension Deficit Index, which provides a monthly-update of UK companies’ pension positions.
“Pension deficit headline figures tend to be very volatile as they incorporate a number of different components that can move in different directions over short periods,” said Patel.
“We have launched the Pension Deficit Index to provide a better understanding of the movements in the headline pension deficits and the interaction between the different measures used for accounting and solvency purposes.
“The reality is that liabilities have got more expensive because the typical UK pension scheme still has a high exposure to interest rate and inflation risks, both of which have been moving in the wrong direction for some time. The risks to both sides of the balance sheet need to be considered together.”
According to Watson Wyatt, the increase in equities helped up FTSE 100 pension assets by £3bn in February. Also during February, inflation expectations implied by the gilts market rose, increasing the amount of pensions expected to be paid and hence the liabilities.
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