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Deficits of the 200 largest defined-benefit pension schemes fell by a quarter in July

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Pension deficits have reduced by 25% during July and the Government's decision to base pension earnings on the consumer price index (CPI) rather than the retail price index (RPI) are set to reduce this further.

Good performance of equities and rising corporate bond yields have pushed the aggregate accounting deficit to its lowest level this year, according to Aon Consulting. 

According to Aon, the pensions deficit of the 200 largest privately-sponsored defined-benefit (DB) schemes stood at £74 billion at the end of July, a massive reduction from the £100 billion deficit reported at the end of June. 

The announcement of the Government’s intention to reduce the level of statutory minimum pension increases that must be granted by UK pension schemes offers another opportunity to reduce pension deficits. But the impact on different schemes could vary considerably depending on their rules and how the legislation is changed. The ultimate impact could be anywhere between nil and £150 billion across UK pension schemes.

The new regulations are complex, but essentially require companies to account upfront for whatever contributions they have committed to in a Recovery Plan.  So, for example, if a company has agreed to pay £130,000 a year for 10 years then that could show as a liability of up to £1 million in their accounts.

Companies can currently bypass this requirement, but that is set to change from 2011 unless trustees agree to necessary rule changes. The combination of reducing deficits (both generally and due to CPI), together with reducing accruals, make the impact of the changes more onerous. Aon is therefore urging companies to contact their pension scheme trustees as soon as possible to ensure they are considering this issue.

Sarah Abraham, consultant and actuary at Aon Consulting, said: "The changes to the treatment of surplus in UK pension schemes are now imminent, and could have some nasty implications.  For many sponsors, if no action is taken now, balance sheet positions could increase substantially next year.

"The coming changes will also create difficulties when companies are renegotiating contribution levels with pension scheme trustees. In our experience some employers are hesitant about making significant contributions if they have concerns about surplus being trapped in an overfunded scheme and the accounting implications will add further to their concerns.

"The Government’s plan to change the indexation on pension increases in the private sector is totally separate from the accounting changes, but it is a clear example of why companies need flexibility to reclaim pension scheme surpluses. We estimate that around half of companies could have their pension schemes pushed into accounting surplus if the change to CPI increases is able to be applied in full."