The pensions industry has urged pension trustees to ride out the week's stock market volatility and take a long-term investment view.
Last week, FTSE 100 pension schemes had a combined deficit of £15bn, according to actuarial consultancy firm Lane Clark & Peacock (LCP).
This prompted concerns about pensions provision, expecially for those in defined benefit schemes who are nearing retirement.
David Poynton, head of credit analysis at LCP, warned defined benefit scheme members to find out whether the employer backing their fund is at risk from the current credit crunch.
"Companies needing to refinance debt in the near future – especially those without investment grade credit ratings – may find themselves facing higher interest bills and more onerous borrowing terms, reducing the resources available to secure pension benefits. At worst this situation could lead to insolvencies, and a reduction in the amounts which pension schemes can recover from insolvent employers,” he says.
LCP recommends trustees understand the sponsor’s current debt arrangements and group structure, the nature and timeline of negotiations for renewal or refinancing, and ensure trustees have arrangements in place so they receive notification of changes that could weaken the pension scheme’s situation.
However, senior industry figures have advised trustees not to panic as markets fluctuate and to concentrate on planning for the long term.
Marcus Hurd, a senior consultant and actuary at consultancy Aon, says: “There is a knock on effect from the equity market and assets are falling. About 60% of a pension fund is invested in equities so they are taking a hit there but they are not directly invested in sub-prime.
“Ultimately, it’s worth taking a long term view of this. Although the deficit is £26bn for the country's 200 largest final salary schemes, that’s lower than at the start of year when it was £40bn. It is a quarter of what it was in January 2006, which was £80bn. Even if it continued for another week at the same scale it would definitely stand at £50bn.”
A spokesman for Winterthur reminds members of the longevity of final salary schemes and warns panicked investors the stock market dive is “just a blip on the radar”.
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