UK - The 200 largest defined benefit (DB) schemes cut their funding shortfall by £26bn between June and July, according to figures released by Aon Consulting.

Additionally, the actuarial consultancy warned that, under the switch to consumer price index (CPI) linking, around half of schemes could find themselves in accounting surpluses, creating a risk of overfunded schemes.

According to figures released today by Aon, the 200 biggest privately funded DB schemes have reduced their funding shortfall by 25% from £100bn in June. 

It said the changes to the aggregate accounting deficit was a result of rising corporate bond yields, as well as a healthy equity market.

Scheme deficits are now at their lowest level since the end of October last year.

Aon went on to say that the switch from linking pensions to the retail price index could have a positive impact on many schemes.

Sarah Abraham, an actuary at the consultancy, said: "We estimate around half of companies could have their pension schemes pushed into accounting surplus if the change to CPI increases is able to be applied in full."

She said a surplus could prove problematic in the near future, as transitory arrangements from the Pensions Act 2004 detailing how surpluses can be transferred are set to come to an end next year.

"Now we're coming to the end of that transition period, people are looking at exactly what the end of that transition period is going to mean, and they've noticed that Section 251 was quite badly drafted," Abraham said.

"We don't think it was really the intention to do what it is going to do."

Abraham said lobbying was now underway for changes to be made to the legislation.

If it remains unchanged, then pension schemes will as of April 2011 no longer be able to transfer funds out of the scheme back to the employer.

She said that, aided by the change to CPI, as well as a change in benefits, there would otherwise be "a real mess" if amendments are not made.

The National Association of Pension Funds had previously warned that the proposed switch to CPI-linking could introduce an investment "mismatch".

Topics