UK - Latest predicted returns figures for the UK defined benefit pensions market saw funds’ deficits hit their highest levels last month for three years, according to consultants who say further changes must be expected if pressure is to be eased on employers.

Data presented by Aon Consulting suggested the combined deficit of DB schemes at the UK’s top 200 listed companies was £73bn (€85.26bn) at the end of last month - the highest level in three years - compared with £40bn in May and the amount lost since the credit crunch began in September 2007 is approximately £50bn.

In contrast, rival firm Pension Capital Strategies claimed the top 100 firms’ schemes fared worse as it said the collective deficit of FTSE 100 companies was £90bn - substantially more than the £50bn documented to the end of April 2009 and over 10 times more than the £8bn on deficits logged 12 months ago.

Both firms use different AA bonds rates to calculate the exact deficit so the true figure of both FTSE 100 and FTSE 200 deficits cannot be known.

However, both consultancies warn the drop in corporate bond rates in June is likely to place more pressure on employers as regulatory and accounting changes are likely to affect short-term liabilities and a company’s balance sheet.

Aon, for example, noted most pension schemes are now underweight in equities and applying “a passive form of asset reallocation” where stocks have suffered the denominator effect and a drop in equity valuations.

Yet it predicts pension funds will in future opt for lower allocations to equities - a move which could potentially alter the combined deficits again - as officials managing the schemes seek to reduce volatility.

That said, trustees have been warned to act carefully as while reducing equity might help to limit the pressure of proposed IAS19 and PPF levy changes, the long-term implication is likely to be lower returns over time, making it tougher to figure existing deficits.

“It should be forgotten that these assets still have significant advantages for pension schemes,” asid Sarah Abraham, consulting actuary at Aon.

“Despite their inherent volatility, the expected return on equities is higher than on fixed interest assets, meaning that over the long-term the risk should be ‘rewarded’. Furthermore, in the long-term, equities should provide an inflation-linked return that is likely to reflect the benefits promised by the scheme better than a fixed interest investment,” she added.

Looking more at regulation Charles Cowling, managing director at PCS, argued in the midst of a recession this was not the time to suggest trustees adopt a more prudent approach to pensions funding as it will force the large majority of DB schemes to close to employees within the next three years.

“These are very difficult times for companies and their pension schemes. We believe that the Regulator’s stance of demanding that trustees react to the economic downturn by putting even more pressure on companies is a mistake. The Regulator’s narrow view of prudence does not recognise that the wider interests of pension schemes and employees (which are reliant on the continuing viability of the employer) may be best served by taking a less aggressive stance,” claimed Cowling.

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