Pension scheme trustees and corporate sponsors need to be aware that large pension deficits will not be reflected in corporate balance sheets, Punter Southall has cautioned.

The value of pension scheme liabilities used by trustees and those reported in company accounts differ, as the calculation methods are different, senior consultant at Punter Southall Ross Matthews said.

He added that the turmoil on the financial markets, the eurozone crisis and quantitative easing have resulted in a surge into UK government bonds by investors and a decrease of 1.1 per cent in gilt yields since the start of 2011. Despite a fall in future inflation expectations of 0.5 per cent, pension scheme liabilities have risen and their deficits are likely to have increased by more than 50 per cent since the start of the year.

However, Matthews pointed out that for company accounting purposes, pension scheme liabilities are calculated relative to the yield on AA rated corporate bonds rather than government bonds. “Since the start of 2011, the fall in corporate bond yields has only been half as much as that seen in government bonds meaning the ‘credit spread’ has widened by around 0.6%,” he said.

“Whilst ordinarily a drop in corporate bond yields would increase pension scheme liabilities on company balance sheets, this is likely to be off-set by the drop in future inflation expectations, meaning that, allowing for the returns on a typical scheme investment strategy, deficits on company balance sheets may remain relatively unchanged or, in some cases, actually fall.

“Given the widening of valuation positions, it is important for ongoing collaboration between trustees and employers on their scheme funding issues and to take a joined-up approach in understanding and managing their pension scheme risk.”

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