U.K. corporations have contributed a whopping £50 billion ($80 billion) to their defined benefit plans over the past six years just to prevent their combined pension deficit from growing any larger.
According to the Aon Hewitt 200 index — which collects data on the funding levels of the top 200 U.K. corporate defined benefit plans — the aggregate deficit was £68 billion when the index first launched on March 31, 2005. As of the end of February, the estimated pension gap remains at £68 billion even after companies contributed a total of £50 billion during the same period.
Pension fund executives “pretty much thought that contributing cash into the pension funds would get rid of the deficits,” said Marcus Hurd, principal at Aon Hewitt based in London. “They've come to realize that's not the case. ... We're now seeing a whole load of funds looking for ways to better manage risk.”
Some funds had succeeded in strengthening their funding position by taking advantage of market opportunities in the past several years. However, the majority experienced “a detrimental effect on the asset side” during the financial crisis, Mr. Hurd said. At the same time, pension liabilities also became more volatile due to the fluctuations in high-level corporate bond rates used to calculate those liabilities.