9th February 2012
Pension fund deficits have been back in the news again. The latest figures from the Pension Protection Fund showed the collective deficit of private sector final-salary pension schemes in the UK had again hit a record high while a survey of more than 200 schemes by consultant Aon Hewitt found almost 70% were looking to take less or no risk with both their assets and their liabilities.
Many people can be put off investing in a company if it has a large pension deficit and such stories only serve to make them more nervous. Should they be? The first thing to note is the numbers that tend to feature in the media are the ones a company includes on the balance sheet published with its results. These are calculated on a half-yearly or even quarterly basis, can be very volatile and are often be a distraction from the real issues.
For an investor, however, the most important consideration is the amount of cash, which may otherwise have been distributed to shareholders, a company must pay into its pension scheme over time. These payments are decided by the pension fund's trustees every three years using an assessment conducted by the scheme's actuaries. At present, these calculations are often giving rise to larger deficits than they would have done previously, primarily because pension trustees use bond yields to work out what a fund's ultimate liability is worth in today's money – the ‘discount rate'. With bond yields at all-time lows, many pension fund's liabilities, and hence deficits, will have increased compared to three years ago.
Of course trustees should take matters like the abnormally low level of discount rates into consideration when they determine the cash payments a company must make, but they are only human and, just like everyone else, they are swayed by what is going on in the world around them.
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