UK pension schemes facing lowest funding shortfall level for year

By DAILY MAIL REPORTER
Updated: 17:31 EST, 5 November 2010

The UK's biggest pension schemes are facing their lowest funding shortfall for more than a year during October, research indicated today.

The 200 largest defined benefit schemes, including final-salary pensions, had a collective deficit of £69 billion at the end of the month, down from one of £80 billion at the end of September and the lowest level since September 2009, Aon Hewitt has shown.

The improvement was driven by rising equity markets, which helped to boost the value of schemes' assets. At the same time gilts, which are used to assess pension liabilities, remained broadly stable during the month.

Funding shortfall: The 200 largest defined benefit schemes had a collective deficit of £69 billion at the end of the month

Marcus Hurd, principal and actuary at Aon Hewitt, said: ‘This good news has been a long time coming for many UK businesses whose final-salary schemes have struggled with volatile market conditions in recent months and ongoing uncertainty.

‘What will be telling is what businesses decide to do with this positive news and whether they put pressure on scheme trustees to adapt their investment strategies in the final two months of the year.

‘Those with strong and more positive views of the market will be looking to capture further gains before the year is out, whilst others will be seeking to protect against losing gains that have been made on the year to date.’

Defined-benefit pensions have become increasingly expensive to offer in recent years in the face of investment volatility and increased life expectancy. The majority of companies have now closed the schemes to new members, with many shutting them to existing ones as well.

They are being replaced with less generous defined contribution schemes, under which the individual shoulders all of the risk of investment volatility and increased life expectancy.

Meanwhile, separate research showed that Britons are more likely to be saving into a pension than people in many other European countries. More than half of people in this country are currently saving into a pension, compared with 48 per cent of people in Germany, 47 per cent in Italy and 41 per cent in Spain, according to insurer Axa.

UK workers also typically start saving at a younger age, first paying into a pension when they are 29, well down on the average age of 37 at which people in France start saving for retirement and 36 in Spain.

But the Italians save the most, typically contributing £5,213 a year to a pension, slightly ahead of the UK's £4,903. Mike Morrison, head of pensions at Axa Wealth, said: ‘This year's Axa survey shows that British workers are gradually facing up to working for longer and being less financially dependent on the State, yet many people are unprepared for the reality of living longer than ever before without a wage packet, and in particular how early on in life they will need to start putting money aside to fund this.’

GfK NOP questioned 30,000 people in several countries for Axa between March 3 and April 6.