Defined benefit pension scheme deficits improved in August despite market falls, according to pension consulting firm Aon Consulting.
The UK’s largest 200 pension funds’ deficits fell from £13bn to £10bn last month. The consultancy attributes the improvements to rising bond yields and favourable investment returns.
During August 2007 the deficit fell below £1bn and peaked at more than £26bn, compared to its August 2006 peak of more than £60bn.
Aon says AA corporate bond yields, the benchmark measure of pension scheme liabilities, have steadily risen over the year to dampen the effects of the market downturn.
The increases to the AA corporate bond spread, which has fallen to 0.59% during the year and reached 0.98% in August, have driven the AA corporate bond yield.
Aon says the rise reflects the market as it prices a higher probability of AA companies defaulting on their corporate debt.
Marcus Hurd, senior consultant and actuary at Aon Consulting, says: “It is likely that schemes will increasingly seek to de-risk at levels of funding that balance affordability with an acceptable degree of risk.
"Once the target is established timing is critical, because, in volatile market conditions, the window of opportunity can be short lived and may not return for months or even years.
“The market turmoil has caused the market to price an increased probability of a major UK company defaulting on its corporate debt, which is reflected in the higher credit spread available on AA corporate bonds.
"Ironically, however, as pension schemes are required to account based on the security of a typical AA company, then as these companies are priced as being weaker, their pension schemes appear more attractively funded.”
The deficit of the largest 200 defined benefit schemes grew in July to more than £45bn from £30bn at the end of June.
Last month actuary and consultancy firm Lane Clark & Peacock said FTSE 100 pension schemes reached a net surplus for the first time since 2002.
Schemes reached a £12bn surplus in mid-July, compared to the £36bn deficit in the same period last year. The market volatility following the sub-prime mortgage crisis took schemes back into the red.
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