The pension deficit for all FTSE 100 companies has now fallen to the lowest level ever recorded, says Watson Wyatt, but, alas, the surging stock market isn’t helping workers’ pay packets. According to research from AON Consulting, employers are squeezing employees’ wages in order to fund final salary pension schemes.

Mind you, the finding of the latest research from AON might not be palatable, but it’s hardly surprising.

Apparently, 49 percent of companies surveyed feel that the increased costs of funding their defined benefit pension scheme has impacted negatively on the remuneration packages their company is able to offer. Almost the same number (48 percent) feel that this will continue to be the case in the future.

Or, to put it another way, we sit on a pension time bomb in the UK, and now AON has found that, in order to fight this bomb and mitigate its impact, we are going to have to fork out. Strange, we thought the solution to the pension crisis lay with a deft swing of the economic magic wand.

And yet it’s not all doom and gloom. Maybe the magic wand has been working after all.

Private equity companies, those bogey men of the modern world, may not have endeared themselves to unions, but they have helped ensure the continuation of the stock market bull run, and, with that, pension deficits have plummeted.

According to Watson Wyatt, the combined pension deficit for all FTSE 100 companies is now £31.8 billion, compared to £90 billion in March 2003.

But don’t get too excited about the news “it’s the lowest deficit ever recorded”. The FRS17 accounting standard, which brought with it harsh new rules for solvency, was introduced in 2002. Records only go back to the inception of this new standard – not very far – and 2002 fell into that rather nasty and protracted bear market,- so it’s hardly surprising the deficit has improved.

The higher rate of interest has helped too. It may seem back to front, but actually, when you think about it, it all makes total sense. The higher rate of interest might be bad news for economic growth and corporate profitability – not that either have suffered much of late – but it is good news for savers and pension companies.

As Stephen Yeo, senior consultant at Watson Wyatt, put it: “Accounting standards require that all the liabilities are valued using bond yields, so deficits are particularly sensitive to them. Although low long-term interest rates are good news for borrowers, they increase the value of pension liabilities for accounting purposes. If recent rises mark a return to the higher yields that used to prevail that will be good news for companies operating defined benefit pension schemes and their members.”

So, for your typical employee it’s all rather mixed. The pension deficit is improving – yippee – but this is, in part, down to the higher rate of interest – groan – and in any case, employers are making you pay more for your pension.

But there’s room for one more cheer. Lurking within the news that employers are making their staff pay more for their pensions shines a bright new star. Apparently, things are getting better. Back in 2006, 50 percent of companies were concerned that the increased cost of funding their defined benefit scheme was already negatively affecting their ability to compete effectively, but, today, that percentage figure has dropped to 31.

But Paul McGlone, principal and senior actuary at Aon Consulting, stuck a down note when he said of his company’s findings: “Based on the survey results, the message from the employers seems to be that the cost of pension deficits is most likely to be met by changes to employee remuneration, with customers being hit second, and shareholders suffering least from the pension debts. It is logical that companies will take this approach given that employees are the ones who will benefit from the pension scheme. However it will still grate with some employees and unions.”

Actually, moving forward, the government faces a huge dilemma. In order to fight the impending pension crisis, we all need to save more. But it’s been low saving and high spending that has kept the good ship UK plc speeding so fast of late. How can the UK possibly initiate the greater saving so desperately required, without hitting that iceberg out there on the horizon?

For further information

to view a chart plotting the improving deficit since 2002 click hereWatson Wyatt

© Investment & Business News 2013