Pension funds are considering a move to gilts-based funding measures as a result of widening credit spreads, according to a survey by Hewitt Associates.

The global human resources consulting and outsourcing company conducted its survey among 50 UK pension schemes, and found that all are considering the switch.

However, Hewitt Associates is concerned that this move may worsen the typical funding position by 30 per cent.

Russell Agius, principal consultant at Hewitt Associates, commented: "What this survey demonstrates is a radical shift in funding assumptions which has the potential to increase significantly the value placed on pension scheme liabilities over time.

"The widening of credit spreads has largely eradicated any prudence when funding using a corporate bond based discount rate. Prudence is a strict legal requirement under the scheme specific funding regime. Schemes continuing to use a pure corporate bond based approach to funding, without making adjustments to the method, risk greater scrutiny from the Regulator as part of their second scheme funding valuations."

Of the schemes surveyed by Hewitt, all had used corporate bonds as their point of reference when measuring their liabilities as part of their first scheme funding valuation under the Pensions Act 2004. None however said they were expecting to do so for the second valuation without adjusting the method used.

Agius added: "Our calculations show that differences between funding levels based on corporate bonds and those based on gilt-based measures can be as much as 30 per cent in the current environment. While schemes may not move the whole hog in one go, many are considering a staggered move to a more prudent approach than is currently in place."

- Pensions Age March 2009

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