The aggregate accounting deficit of defined benefit (DB) schemes has improved by about 25 per cent, from a £100bn shortfall at the end of June to £74bn at the end of July, according to Aon Consulting.

The firm said the 200 largest privately sponsored DB schemes saw deficits shrink thanks to good performance in equities and rising corporate bond yields.

Aon also welcomed the Government’s proposals to reduce the level of statutory minimum pension increases that must be granted by UK pension schemes as it offers another opportunity to reduce deficits. However, how the legislation is changed will determine the impact, which Aon said could be anywhere between nil and £150bn across schemes.

However, Aon warned that a reduction in pension deficit, should it come at the same time as schemes continue to close to accrual, creates risks for companies due to changes to the treatment of surplus funds. Representatives, Aon said, must be vigilant and ensure that they are not caught by this change, which could worsen balance sheets.

The new regulations require companies to account for any contributions they have committed to in a Recovery Plan.

Currently, schemes can bypass this, but from 2011 this will change unless trustees agree to necessary rule changes.

“The changes to the treatment of surplus in UK pension schemes are now imminent, and could have some nasty implications,” explained Sarah Abraham, consultant and actuary at Aon Consulting. “For many sponsors, if no action is taken now, balance sheet positions could increase substantially next year.

“The coming changes will also create difficulties when companies are renegotiating contribution levels with pension scheme trustees. In our experience some employers are hesitant to make significant contributions if they have concerns about surplus being trapped in an overfunded scheme and the accounting implications will add further to their concerns.”

Abraham added that the Government’s change to CPI from RPI for the indexation on pension increases in the private sector is separate from the accounting changes, but demonstrates the need for companies to be flexibly to reclaim pension scheme surpluses. “We estimate that around half of companies could have their pension schemes pushed into accounting surplus if the change to CPI increases is able to be applied in full.

“Accounting treatment aside, the changes in legislations on surpluses could create a genuine overfunding risk for employers – whether on an ongoing or accounting measure.”

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