Best and worst performing FTSE 350 schemes’ funding levels diverge further - Aon

The best and worst performing pension schemes of FTSE 350 companies have seen “further divergence” in their funding levels in 2020 due to Covid-19 volatility, according to Aon.

Its report – Rocky 2019 and Rollercoaster 2020 – highlighted that the effects of Covid-19 meant that the market volatility observed in 2020 so far “dwarfed” 2019’s volatility.

The report, authored by Aon partner and head of accounting strategy team, Trevor Brooks, and senior consultants, Divyesh Ravalia and Alastair Kennis, found that there continued to be “significant divergence” between the best and worst funded FTSE 350 pension schemes.

At the end of 2019, the top 10 per cent best funded schemes were more than 115 per cent funded, while the bottom 10 per cent were below 80 per cent funded.

According to Aon, 2020 has seen “further divergence”, with schemes’ resilience being tested by the financial impact of Covid-19 and headline accounting positions “flattering the true funding positions of many schemes”.

“Funding level outcomes vary significantly for different investment strategies,” the report stated.

“Schemes with higher hedge ratios and lower exposure to growth assets have seen their funded position less severely affected.

“With market volatility expected to continue, many companies are now taking actions to protect against future shocks and also to improve funding.”

Furthermore, the aggregate funding position of FTSE 350 companies has fallen to 94 per cent, as of 30 June, according to Aon’s research.

At the start of 2019, the aggregate funding position within the FTSE 350 was 100 per cent, before falling to 97 per cent in late-August then rising to 103 per cent by the end of the year.

However, by mid-March 2020 the aggregate funding position had fallen to 95 per cent before declining to 94 per cent at the end of June.

Aon found that, by mid-March, accounting liabilities fell as AA credit spreads increased and inflation expectations reduced.

However, by 30 June credit spreads had fallen back with liabilities rising again.

In 2020, growth assets had been impacted by the economic uncertainty, with equity falls of 20 per cent in March alone.

Despite this, Aon noted that falls in yields had bolstered matching assets and reduced the impact of the equity decline.

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