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The aggregated
pension schemes of the FTSE 100 have lost £30bn in the second
quarter, falling from a surplus of £21bn to a deficit of £9bn,
according to Redington Partners.
The consultancy firm has calculated this on an IAS19 accounting
basis, and the greatest contributor to this £30bn loss has
been increased liabilities due to falling long term interest rates
and rising long term inflation expectations. An example of this
is breakeven inflation on the 2047 index-linked gilt exceeding four
per cent in May 2008.
Robert Gardner, partner and co-principal at Redington Partners,
said: “The current inflationary environment is causing real
problems for pension funds. On one measure, every 0.01 per cent
increase in long term inflation expectations has added around £820million
to FTSE 100 liabilities.”
Redington has also used a “Value at Risk” risk measure
to estimate that there is a one in 20 chance of FTSE 100 pension
schemes between them losing more that £5bn in a single day.
Dawid Konotey-Ahulu, partner and co-principal at Redington Partners,
added: “Given that there are more than 15 corporates with
UK pension scheme liabilities greater than £6bn, one might
argue that (through their pension schemes) those UK corporate sponsors
are running a combined level of risk more commonly associated with
the collective trading books of the City and Wall Street.
“Falling long term interest rates, rising inflation expectations
and the need for stronger longevity assumptions are proving a lethal
combination of risks for pension liabilities. The outlook for most
assets is just as precarious. All in all, this is treacherous terrain
for defined benefit pension funds and risk mitigation has never
been more important. It is vital to measure potential future losses
within the pension fund.”
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Pensions Age July 2008
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