2010 funding ratios derailed by volatility – Aon Hewitt

EUROPE - Funding ratios have fallen across Europe due to volatile bond markets, according to new figures from Aon Hewitt.

The consultancy said this was despite asset values staying relatively flat over the last 12 months.

However, it said falling bond markets had caused an increase in liabilities, with the lowest point reached in August when funding ratios across Europe were only 64%.

Matt Wilmington, Aon Hewitt’s Global Risk Services head in Europe, said finance departments were largely of two minds after 2010.

“Given where they started, there will be an element of disappointment that funding levels did not improve,” he said.

“However, coming off a more dismal position at the mid-year point, there will be some relief the final levels were not as low as was feared.”

The company said funding levels rebounded to 73% in December, but fell by 2 percentage points on New Year’s Eve, once again demonstrating the volatile nature of the market.

Wilminton said: “Governments have increasingly recognised the problems this volatility is causing, with legislative proposals ranging from changing benefit design and retirement ages, through the relaxation of funding requirements and state-sponsored annuity provision.”

However, not all countries saw a fall in funding ratios, with the UK’s average scheme now almost 91% funded, compared with 85% in January 2010.

Despite pension scheme deficits across FTSE 350 companies falling by £10bn to £50bn, Kevin Wesbroom, Aon Hewitt’s Global Risk Services leader, said companies would be unhappy with market fluctuations that exceeded 1 percentage point last year.

He added that investment strategies were increasingly likely to address the problem this year.

“With deficits having stabilised, this may be the right time for companies to review their risk/reward balance and to consider if, how and when they want to take risk off the table — or whether they are happy continuing to play volatile markets to gain that elusive additional return that will reduce their cash commitments,” he said.