However, as any shopper knows, affordability is not a function of price alone. It also depends on how much you have to spend.
If a well-funded pension scheme invests in the bonds that determine annuity pricing, its assets will grow broadly in line with the cost of settling liabilities. With a different investment strategy, opportunities to settle pension liabilities may indeed be short-lived, but can be created by strong investment returns as well as by low annuity prices.
The total return on equities in April was around 6%. For schemes with a substantial equity exposure, this would have more than cancelled out the rise in annuity prices during the month.
With more money in the fund, the employer would not have to pay so much to buy out its liabilities.
There are also benefits in shopping around. Some of the quotes supplied to our clients during April have been more stable than Paternoster’s figures suggest, reflecting the different approaches taken to pricing liabilities.
John Ball is head of UK defined benefit consulting at Watson Wyatt
