While the government will no doubt claim some responsibility for the recent fall in pension fund deficits, the main reason is the rise in stock markets over the last 24 months – although this rise may be in danger as world stock markets continue to suffer from the US lending crisis.
A recent survey by Lane Clark & Peacock found the top 100 companies in the UK have seen their pension fund positions turn from a £36 billion deficit to a £12 billion surplus over the last 12 months. While the main reason has been the rise in stock prices, many have also undergone major rationalisation of their pension arrangements, adding extra funding, converting a number of final salary schemes in to money purchase, and reeling in future pension payments for existing members. So is the worst now over?
While this reprieve has been welcomed by many, especially current and future pensioners, the situation could take a turn for the worse as quickly as it has picked up. There are a couple of factors to take into account, including :-
Worldwide Stock Markets
Worldwide stock markets have fallen sharply over the last 2 weeks, with many forecasting further falls to come. This will have an immediate impact upon the funding situation for many pension schemes, and could see some fall back into deficit.
Forecasting life expectancy is a problem which has blighted the industry for some time, and if as expected official life expectancy figures rise in the future, the industry may well be caught out again. Even the smallest error in forecasting the average life expectancy can have a major impact on the liabilities of some of the larger pension funds – possibly increasing individual fund liabilities by hundreds of millions of pounds.
While it is encouraging to see the recent turn around in pension fund liabilities, there is still much work to do. If the worldwide economy were to take a major downturn then this would reduce the amount of extra funding available from industry. Fingers crossed we have seen the worst of the situation, but nothing is certain at the moment.