The Covid-19 pandemic has had a marked effect on the funding of DB schemes, with a wide gap remaining between the best and worst-funded schemes, according to Aon’s latest accounting report.
It points out that the effect of market volatility experienced in 2019 has been dwarfed by the turbulence seen in 2020. Its report points out that FTSE350 schemes had a ‘rocky 2019’ but have had to endure a ‘rollercoaster 2020’.
Their ability to perform during these testing conditions will depend on their investment strategy and approach to risk and governance, Aon said.
Aon’s figures show that after starting 2019 100 per cent funded the aggregate funding positon of the FTSE350 pension funds declined to 97 per cent in late August, before recoving to 103 per cent by the end of the year.
However this position changed in 2020 as the effects of the pandemic and subsequent economic lockdown began to impact markets worldwide.
Aon’s figures show that by mid-March accounting liabilities in these FTSE350 DB schemes fell, as AA credit spreads increased significantly and inflation expectations reduced. But by the end of June credit spreads had fallen back with liabilities rising again.
In terms of balance sheet asset, during 2020 growth assets have been significantly affect by the economic slowdown with equity falls of 20 per cent in March alone. However significant falls in yields have bolstered matching assets and dampened the impact of the equity crash.
The report found that there was continued divergence between the best and worst funded pension plans. At the end of 2019 the 10 per cent were more than 115 per cent funded and the bottom 10 per cent were below 80 per cent funded.
2020 has seen further divergence with schemes’ resilience tested by the economic impact of Covid 19 and headline accounting positions flattering the true funding positions of many schemes.
The Aon report says schemes with higher hedge rations and lower exposure to growth assets have seen their funded position less severely affected. With market volatility expected to continue many companies are now taking actions to protect against future shocks and also to improving funding.
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