U.K. corporate pension deficits nearly tripled last year — while those at U.S. corporate plans nearly halved — illustrating the sharp differences in how inflation expectations affect these plans.
While U.K. corporate defined benefit plans include limited adjustments for inflation, their U.S. counterparts typically do not peg benefits to inflation.
Aggregate FTSE 350 company defined benefit plan deficits rose to £170 billion ($272 billion) as of Dec. 31, up from £60 billion a year before, driven by a combination of higher inflation expectations and decreased corporate bond yields, according to a Mercer estimate. The estimated deficit reflected a funded ratio of 73% as of Dec. 31, down from 86% at the end of 2008.
But while U.K. companies saw up to £170 billion wiped off their balance sheets in 2009, U.S. corporate plans added $180 billion to theirs, according to a separate Mercer estimate. The aggregate deficit of S&P 1500 companies' pension plans was $229 billion, down 44% from the 2008 year-end deficit of $409 billion. U.S. plans benefited from stronger investment returns, higher equity allocations and weaker bond yield declines than their U.K. counterparts, raising the funded ratio of U.S. plans to 85% from 75% a year before, according to Mercer.
Inflation estimates “have a very big impact (on U.K. funding estimates) ... probably bigger than people realize,” said Sarah Abraham, a Manchester, England-based consultant and actuary at Aon Consulting. She noted, however, that declining corporate bond yields — which also increase pension liabilities — was the primary factor behind greater deficits in 2009. “But everybody was expecting that, whereas you don't expect to see changes in inflation. You expect inflation to be fairly steady, especially long-term inflation.”
Aon found that the 200 largest U.K. corporate plans ended the year £87 billion in the hole, down from a £10 billion surplus at year-end 2008. Higher inflation estimates accounted for £40 billion of the jump in liabilities in 2009, Ms. Abraham said.
She said the average long-term inflation assumption increased to about 3.75% as of Dec. 31 from about 3.25% a year before.