Record losses for UK DB plans underscored by reliance on markets…

Five consecutive days leading into March were the most volatile on record for UK final salary pension schemes since accounting standards were changed in 2001, reflecting the risks associated with funding dependence on investment markets.

Aon Consulting, which measured the knock-on effect of volatile markets as measured by company accounts, found the combined deficits for the UK’s 200 largest defined benefit (DB) schemes between 26 February and 4 March, as calculated by the Aon200, were: £38 billion; £41 billion; £68 billion; £73 billion and £56 billion.

Marcus Hurd, head of corporate solutions at Aon Consulting in London, said volatile times such as these highlighted the need for every company to carefully balance its own risk appetite and cash management situation to find its optimal solution.

“Pension scheme deficits can only be funded by two sources – investment returns or contributions,” he said.

“Every company faces a difficult task in balancing the two approaches, because increased reliance on investment returns also often comes with increased risk.”

Hurd said company directors were facing a roulette wheel of pension scheme deficits.

“The levels of changes we are seeing are frightening even the hardiest finance director. A cool head and knowledge of all the options available are essential in these difficult times,” he said.

“We are seeing swings of unprecedented proportions at the current time. With one half of companies about to formally report their position at March 31, this is a real concern.”

However he said while pension scheme losses are obviously concerning, unless there is a risk the sponsoring employer goes into solvency it is worth remembering that pension schemes are long-term investors and have long periods of time to recover.

“It is only short term measurements, such as company accounts, that reflect the losses,” he said. “Sensible long-term financial planning and risk management should be high on the agenda.”