£120bn of losses are hidden by the FRS 17 accounting standards following the financial crisis, says Aon Consulting.

Research by the employee risk and benefits management firm shows that, despite Britain's largest 200 final salary schemes showing month-on-month improvements of £28bn to a £8bn deficit at the end of April, there is a funding position with a huge deficit of around £130bn.

The company has warned that this gap in funding could see trustees requesting higher cash contributions from employers, and in turn reduced service provision for final salary members.

The Aon200 Index, which tracks the accounting positions of the 200 largest privately sponsored pension schemes, is to be extended through May to include schemes' positions on a funding basis. The Aon200F will track the cash contribution requirements for the 200 schemes, and Aon believes this will provide a better gauge of the economic crisis' impact on UK pension schemes.

Sarah Abraham, consultant and actuary at Aon Consulting, said: "Confusingly, the apparent cost of running pension schemes, as shown in company accounts, has actually reduced as a result of the credit crunch. This is due purely to the way in which the accounting standards work, with asset falls being masked by reductions in liabilities that are a result of high yields on corporate bonds.

"If we consider how the position would look on the type of basis that would be used to set contributions to a scheme, however, then the picture changes dramatically and we can really see how much damage the economic crisis has done."

Abraham added that the huge funding shortfall will need to be rectified with additional contributions, and could translate to an annual contribution of almost £20bn.

"On top of this, most employers will still be allowing employees to earn new pension benefits and the total cost of operating pension schemes could therefore be as much as £30bn p.a.. That would be the highest level of pension contributions that we have ever seen. However, given that many employers will not be able to afford such high contributions, we are likely to see extensions in the period over which deficits are removed with correspondingly lower contributions being made to pension schemes."

Aon was keen to highlight that pension schemes be created like other forms of company debt. "The truth is that all kinds of gremlins are hidden in company accounts and it would be unfair to penalise pension schemes in particular at this time. Such a move would only hasten the demise of final salary pension schemes," she concluded.

- Pensions Age May 2009

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