UK - Financial directors are being advised to review their funding deficits as improved market conditions may have reduced the level of contributions now required.

UK-based consultancy Hymans Robertson has suggested finance directors revisit the funding agreements put in place in 2006 or early 2007 as recent activity in the stock and bond markets are likely to have help shore up any deficits and produce gains which should now be locked in.

Recognising equity markets have seen pressure over the two weeks - the FTSE 100 index falling approximately 4.7% since July 23 and the Dax dropping 5.2% in the same period - Martin Potter, partner at Hymans, said the gains seen through improved market performance over the last few months mean huge cash demands from pension funds may no longer be needed.

"Most pension schemes have experienced significant improvements in their finances over the last six months and if the same FDs were negotiating their pension contributions now, the outcome would most likely be much lower contributions," said Potter.

"Finance directors who committed to high pension contributions last year could find themselves paying more simply because their pension scheme's valuation came at a time when market conditions were unfavourable," he added.

Hymans suggests FDs obtain an updated valuation on the scheme's funding position and renegotiate agreements with trustees if necessary.

Indeed, financial accounting for pension funds could show improved funding levels at present given their need to hold fixed income securities supporting their long-term liabilities as Dominic Pegler, head of fixed income strategy at Barclays Global Investors, notes the recent rally in the bond markets is likely to have improved bond returns held by pension funds.

Whereas pension funds across Europe have been reporting bond performance has suffered in recent months as a result of higher bond yields, Pegler said the rally in government bonds and rise in corporate bond yields could improve financing positions.

"The bulk of [pension fund] assets will be in government bonds and high quality corporate bonds, so the past two weeks would have been positive," said Pegler.

"What has happened in the bond markets will give investors an opportunity because having had five years of relative stability in premiums and yields, the degree of opportunities to add yield premiums have increase quite substantially," he concluded.

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