UK - Stock market gains were wiped out by increases in scheme liabilities last year, Watson Wyatt claims.
And the consultant said the FRS17 deficit for pension schemes at the end of last year was scarcely unchanged from the position at the end of 2002.
Watson Wyatt said deficits had not fallen because the interest rates on high grade corporate bonds – which are used to calculate FRS17 liabilities – had fallen further than those on gilts.
Partner Robert Hails (pictured) said: “While a rising stock market has been positive, scheme liabilities have increased due to higher inflation expectations and lower corporate bond yields. The stock market recovery was welcome but rising liabilities meant it has done little to eat into these accounting deficits.”
Hails explained: “What is critical is the contraction in double-A corporate bond yields over 2003. Fixed interest gilt yields actually rose over the period, but because the credit margin effectively halved over the period, double-A corporate bond yields decreased and FRS17 liabilities increased correspondingly.”
Watson Wyatt – which advises more than half of the UK’s 100 largest corporate pension schemes – estimates the aggregate FRS17 deficit for FTSE100 firms at £60bn.
It said the deficit for all UK pension schemes could be as much as double this figure.
The total, however, is more than £10bn higher than the estimation made by Hewitt Bacon & Woodrow. It claimed the deficit for FTSE100 company schemes had fallen from a record high of £100bn – as at March 2003 – to just under £50bn to the end of last year.
Watson agrees with Hewitt’s calculation of March’s record figure but estimated a significantly higher aggregate position.
Hewitt associate Raj Mody said the disparity in the figures was unsurprising. He said: “The only way to get an exact figure would be to conduct accurate analysis of each scheme and allow for scheme-specific plans – such as arrangements to make good deficits through additional contributions.”
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