Stockmarket dip adds £20bn to pension deficits in UK’s top 200 final salary schemes

A 5% fall in stockmarkets increased pension scheme deficits by £20bn in May, according to analysts.

However, despite these falls, pension scheme funds are, on average, better funded than at the start of the year because of high bond yields.

Aon Consulting’s monthly tracker of pension scheme deficits at the UK’s 200 largest defined benefit (final salary) schemes shows that the total estimated deficit for the 200 schemes was £52bn at the end of May 2006, compared with £32bn as at the end of April 2006 and £72bn as at the end of 2005.

Paul Dooley, senior consultant at Aon, said the stockmarket falls were bad news for many pension schemes, but people should not get carried away with this.

“The greatest risk for most pension schemes is actually a fall in long-dated bond yields,” he said. “These yields are still higher than as at the start of the year and have more than offset the falls in stockmarkets over the year to date.”

Dooley said that companies were looking to invest in “diversified growth” investments as an alternative to equities as a means of reducing the volatility of their pension deficit.

“Our analysis has shown that if a typical scheme holds half of its equity assets in alternative investments – such as property, hedge funds and private equity – it would be expected to see the same long-term returns with significantly less volatility,” he said.

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