UK - The true value of the estimated UK pension fund deficit for the top 100 listed companies would have almost doubled over the course of the year to £245bn (€270bn) had all liabilities been hedged, suggest figures from consulting firm Redington Partners.

Calculations conducted by the group suggest the true “economic” deficit is substantially higher than that presented by listed companies in their accounts, as liabilities discounted against the swap curve are now at a deficit of £245bn at the end of March 2009 compared with £124bn in March 2008.

The collective deficit currently showing for FTSE 100 companies to the end of March 2009, according to Redington, could have been £51bn under IAS19 calculations - a £72bn shift from the £21bn surplus in pension fund assets held at the end of March 2008 - depending on the AA-rated bond discount spot rate selected, as AA bond yields dropped 20 basis points and the FTSE 100 index fell 30%.

In reality, the pension funds run on behalf of FTSE 100 companies are not managed by purchasing liability swaps at Libor flat - as calculated by Redington - so the calculated figure is not an accurate indicator of the true value of pension fund liabilities.

That said, it does indicate pension funds may not have performed well within the last year even if they had sought to cover the potential risk of liabilities by purchasing swaps, as the bulk of the extra charges were generated by a £58bn increase in liabilities and a £57bn fall in the value of equities.

On any basis, these numbers illustrate the immensity of the challenges facing defined benefit pension funds,” said Dawid Konotey-Ahulu, partner and co-founder at Redington Partners.

“Pension liabilities have risen very sharply, entire asset classes are in freefall and all at exactly the point of the most extreme weakening of the collective corporate covenant in recent history. There have been many references in the past to the “perfect storm” but this time it’s the real thing,” he added.

According to Redington’s calculations, bonds, property, equities and liabilities all increased the pressure on pension funds, while cash holdings made a tiny gain.

 

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