FTAdviser.com

Advertising

According to Aon Consulting, the accounting deficit for the 200 largest privately sponsored pension schemes improved by £38bn in November, jumping back into surplus.

The past month has been indicative of a year that has seen the most volatile pension scheme conditions ever, setting a number of records.

The most recent Aon200 Index showed that the overall funding position improved from a deficit of £15bn at the end of October to a surplus of £23bn by the end of November.

The principal explanation for this turnaround is falling expectations of future inflation, which fell from 3.2 per cent to 2.6 per cent over the month.

In the period between 2001-07,there had only been six daily swings of £10bn or more. According to the index, however, this year alone there have been 21 such swings, including six over eight days during October.

Meanwhile, at the end of November, the sector had seen the largest year-on-year fall in scheme asset value, which plunged £80bn. This is the largest drop in any year since pension schemes were formed in the middle of the last century.

Likewise, projected inflation reached a record high when it topped 4.2 per cent in July, the highest level since pensions accounting was introduced in its current form in 2001.

Inflation then fell back dramatically during the rest of the year, so that it is now lower than at the start of the year and has saved final salary schemes £45bn.

Corporate bond yields also reached their highest level this year. AA corporate bond yields, the benchmark measure for pension scheme liabilities, rose from 5.75 per cent at the start of the year to 7.75 per cent in October. These rising bond yields have saved schemes £60bn.

As a result there was a £25bn year-on=year improvement during 2008, as the huge falls in equity markets were offset by these rising bond yields and falling expectations of inflation.

Despite this, however, given the current uncertainty, Aon has warned employers and pension scheme trustees to look very carefully at market conditions and review each pension scheme's exposures to market risks.

Marcus Hurd, head of corporate solutions at Aon Consulting, said: "It has been one hell of a year and I have never seen anything like it, with market conditions frequently changing dramatically on a daily basis.

"We have never known trustees and employers to express so much concern, the pensions picture is not black and white, however, and current economic factors present opportunities as well as exposing schemes to risks.

"There are opportunities for the quick footed, while those that drag their feet are facing a nightmare. The biggest challenge for 2009 is to ensure long term strategies are in place and ensure that pension schemes are able to take advantage of opportunities as and when they arise.

"We are likely to see more dynamic decision making and greater consolidation of pension schemes to ensure they can act quickly enough."