Should Mervyn King, governor of the Bank of England, follow through with his proposal to restart the emergency quantitative easing programme due to weakness in the eurozone, scheme deficits could suffer further, warns Aon Consulting.

Although pension schemes have recently experienced relatively stable results, Aon said the uncertainty surrounding the Bank of England's intentions when it comes to quantitative easing will give the UK's largest companies cause for concern.

"While we are seeing levels of volatility for pension schemes beginning to decrease, there are certainly still dark clouds on the horizon," commented Marcus Hurd, head of corporate solutions at Aon Consulting. "Quantitative easing tends to increase the price of government bonds and so reduce their yield. This in turn forces up pension scheme liabilities and increases deficits."

Hurd said that while quantitative easing should help the economy recover as a whole, it also increases final salary pension scheme deficits and puts additional pressure on the companies that it is trying to help, creating an economic paradox: "The government is competing with pension funds for buying up valuable gilts and this therefore pushes up the price of gilts. This rising price inflates pension scheme liabilities and so magnifies the deficit.

"Many pension schemes with April 2009 valuations which fell due just after the initial phase of quantitative easing, are still struggling to agree contributions with their sponsor in light of the inflated deficits at that date. Sponsors of these schemes will be acutely aware of the impact that the change in yields on government bonds can have on their liabilities. For example, a 0.5 per cent increase in the gilt yield, which has been widely quoted as the impact of quantitative easing, adds approximately £50bn to the Aon200, and around £100bn to the overall UK pension deficit," he said.

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