Liability rises cancel out pension asset growth

State Street and BNY Mellon claimed UK schemes’ investments returned an average of 13% last year.

But PensionsFirst said movements in the corporate bond market would have increased liabilities by an average of 12% and the combined impact on pension scheme deficits would have been very small.

“If you looked at the deficit at the start of the year and the deficit at the end of the year, it seems like quite a non-eventful year,” said Andrew Morris (pictured), assistant vice president of client solutions at PensionsFirst.

“With asset returns being in double-figure percentage terms, it seems like a much more exciting year than it really has been.

“But it’s always important to look at both sides of the story. If the assets and liabilities have both increased, the net effect has been pretty much zero.”

Accounting liabilities are calculated using AA corporate bonds yields to discount future pension promises. Over 2010, AA bond yields fell, leading to increased liabilities.

The iBoxx AA 15-year index yield dropped from 5.75% to 5.45% between December 31, 2009, and December 31, 2010.

This would increase the accounting liability for a typical pension scheme with a liability duration of 20 years by around 12%.
Morris said unwinding discount rates also lead to increased liabilities.

“If you think about a pensions payment which is due to your pensioners in 2015, in 2009 you had six years of discounting available. But at the end of 2010 you only have five years of discounting, so it’s a lot closer,” he said.

“It’s like the reverse of interest.”

The results of UK pension scheme investments in surveys from both State Street and BNY Mellon, showed much of the outperformance had come from emerging market holdings.

Returns from international assets, outside Europe, reached between 17% and 25%, while continental Europe returned just 6%.

This compares to returns of between 17% and 19% in 2009.