April 2012_issue_11
This chart, looking at the ratio of the fi nancial assets of the pension plan divided by the liabilities under a variety of different bases, shows how underfunded UK pension schemes would be on a mark-to-market basis if Solvency II is applied. The chart assumes the value of scheme assets are the same for all three lines. The blue line represents the accounting funding level, which shows the market value of investments divided by the liability in the pension scheme discounted on an AA corporate bond yield. The grey line shows the Pension Protection Fund liability discounted using a gilt yield, taking into account the 90% cap of scheme liabilities and the annual cap on benefi ts. Even though the discount rate is lower for the PPF liabilities, the value of the two funding levels is similar. However, the green line shows the funding level under Solvency II, using a discount rate of swaps minus 10 basis points as implied by market consistency, would be considerably lower, hovering somewhere between the 55% to 60% level since August last year.
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