Although pension deficits have now decreased to £26bn, the accounting measurement Financial Reporting Standard 17 (FRS17) is hiding the underlying volatility of scheme deficits, claims Aon Consulting.
In its latest monthly tracker of the top 200 defined benefit (DB) pension scheme deficits Aon says after three years of relative stability, the last 12 months has seen significant levels of volatility.
In particular it claims the global market fall - which originated in China in February – resulted in the highest single-day increase in deficits of £11bn.
But despite this Aon points out the last year has seen pension deficits improve by 45% to £26bn, and it says the most recent £22bn improvement in scheme deficits – to March 2007 - follows a similar improvement in the previous year to March 2006 of £20bn.
However it warns this steady improvement in FRS17 deficitsover the last two years could be misleading, as Marcus Hurd, senior consultant and actuary at Aon Consulting, points out the FRS17 accounting standard uses a single day point estimate, which fails to acknowledge underlying volatility.
Hurd adds: “£10bn swings in the national deficit have occurred from one week to the next. Indeed, companies reporting a few weeks earlier would have reported losses over the year at a time when the national deficit was almost double its current value at £50bn. These kind of results show the shortcomings of using a short term basis to measure long-term obligations under FRS17."
These latest figures follow the publication of a recent report by the Association of British Insurers (ABI), which suggests FRS17, which requires companies to include pension liabilities on its balance sheet, forces trustees and employers to adopt more conservative investment strategies which could be costly in the long term.
Robert Hunt, director of Xafinity Consulting, says the ABI’s report highlights the financial harm which can be caused to companies and the economy by trustees following the “herd” and aggressively moving from equities to bonds.
He adds: “Rather than reducing risk such an approach has the capacity, through lower returns, to increase the risk that deficits will remain. Striving to achieve more “efficient” investment of pension assets through greater diversification and use of alternative assets can achieve the desired stability but not at the expense of lower returns and hence higher costs.”
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7034 2681 or email [email protected]IFAonline
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