Major UK pension schemes in the black

Britain’s largest pension schemes have moved into the black for the first time in more than five years, suggesting that many of the nation’s employers have turned a corner in their battle to avert a future pensions crisis.

Aon Consulting, which tracks the 200 largest pension schemes, says it is the first time companies have been able to show a surplus since the vexatious pension accounting standard, FRS17, was introduced in June 2001.

“I think it is a symbolic day and it is a great step forward,” said Marcus Hurd, senior consultant and actuary at Aon. But he said it remained to be seen whether the aggregate surplus would persist.

“The extent to which schemes are in accounting surplus is not enough to buy out all benefits,” Mr Hurd warned. “Surplus can be here today and gone tomorrow.” A drop in equity markets or a fall in interest rates could erase scheme gains overnight.

He warned that even an accounting surplus may not be enough to meet all pension promises.

The move into surplus – which came at 3.25pm on Friday – reflects a steep rise in yields on AA-rate corporate bonds, the rate at which liabilities are discounted for accounting rules.

The IBoxx 15-year AA corporate bond yield closed at 5.51 per cent on Friday. At the end of 2005, just before their trough, the yield was 4.6 per cent. That move will have cut liabilities by at least 20 per cent.

The strong rise in equities has also helped. However, volatility in February produced an aggregate deficit of £50bn for these same schemes.

Narrowing pension deficits have prompted employers’ groups to urge the government to permit them to take cash out of their schemes. The Department for Work and Pensions has said it will consider the issue.

When it was introduced, FRS17 offered the most realistic picture of pension finances at any particular point in time.

However, insurers use more conservative assumptions when they agree to take liabilities off corporate balance sheets.

Mr Hurd said Aon was urging clients to be careful about how much cash they add to schemes showing an accounting surplus.

While companies whose schemes remain open to existing employees can show that surplus on their balance sheet, those who have cut off staff to further accruals cannot.

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web.