According to Aon Consulting analysis, the US deficit will widen to $129bn (€110.4bn) this December 2005 - up $51bn from a year before. By contrast, the overall deficit held by the UK’s 200 of the largest companies – including all FTSE 100 companies – is expected to remain relatively unchanged by year end from 2004 at under £70bn (€103.4bn).
The research, which compares pension information data for US companies utilising FAS87 accounting rules with similar data for UK companies using FRS 17 rules, indicates that the potential increase in US pension plan underfunding stems from low interest rates, weak investment performance, and lower corporate funding of pension plans.
Contributing to the increase in overall deficit levels among the Fortune companies in 2005 was a nine basis points drop in the discount rate, which increased the liabilities by about 1.5 per cent. Andrew Claringbold, an actuary at Aon Consulting, said that the levelling out of UK pension funds is “largely down” to UK investor returns being better than those in the US.
With bond yields having fallen on both sides of the Atlantic, liabilities have been pushed up – as liabilities are referenced to bond prices. “But relatively good returns of UK equities this year has helped counterbalance the increase in liabilities,” Mr Claringbold said.
In respect of asset allocation among UK institutions, Mr Claringbold pointed to a “slow movement” out of equities into bonds or equivalents like swaps, to make the bonds more like the pension liabilities. Nevertheless, the shift over the last two years out of equities has been 60 to 58 per cent in equities.
This stabilises the situation somewhat, but Mr Claringbold added that there were “still a lot of unmatched liabilities out there”. Reflecting surging demand in pension fund use of inflation-linked swaps, Watson Wyatt predicts the inflation linked swaps market in the UK will more than triple this year.
He maintained that changes in asset allocation strategies undertaken in the UK several years ago had not yet had a “material impact” on the figures, There are funds waiting to come out of equities into safer investments, he added.
Variation of investor strategies seems less pronounced in US than the UK with a herd mentality being particularly pronounced there, Mr Claringbold notes. “If they want to reduce volatility relative to their deficits, [US pension funds] will need to reduce exposure to equities and increase allocations to fixed-income.” However, the trend has been going the opposite way.
RA
