01 November 2006
Favourable investment markets have reduced pension fund deficits
of FTSE 100 companies to their second lowest level in the last four
years, according to Watson Wyatt.
The combination of rising share markets and rising bond yields
have reduced the pension deficits of FTSE 100 companies on the
IAS19/FRS17 accounting basis from £50 billion at the
beginning of October to £42 billion by the end of the
month.
"Only at the end of April this year have deficits been smaller
in the last four years." said Stephen Yeo, a senior consultant at
Watson Wyatt. "Shares are now above the level they were then, but
bond yields, which are used to determine liabilities under IAS19,
are still below their recent peak."
The Pensions Regulator is using IAS19 calculations as one of the
triggers for further investigation of pension scheme funding in
order to prioritise its workload under the new scheme-specific
funding regime. Those schemes that are not expected to be fully
funded on this measure by the end of a recovery period, typically
no longer than ten years, will be required to supply further
information to the Regulator.
Stephen Yeo said: "Even though scheme funding is improving,
early evidence from the new funding regime is that although funding
targets are being increased many trustees and companies are
agreeing targets that fall short of the full IAS19 reserve. In
general this is by making an allowance for equities, and other
return-seeking assets, to outperform bonds when setting the funding
target. This is in line with guidance from the Regulator supporting
a scheme-specific approach, taking account of scheme maturity and
the strength of the employer covenant."
