Deficit in UK company pensions soars in September

Posted on October 13th, 2011 | Categories - News

New data has shown that the deficit in UK Defined Benefit schemes rose in September to the second highest level ever.

Defined Benefit pensions are often referred to as Final Salary schemes and provide a guaranteed income for the member based on salary and length of membership in the scheme.

The data, produced by the Pension Protection Fund (PPF), who provide a safety net for underfunded schemes of insolvent employers, showed that the aggregate deficit of schemes rose by nearly £80 billion in September to £196.4 billion; in August the deficit was £117.5 billion.

Falling stock market, lower bond yields

Defined Benefit and Final Salary pensions invest heavily in stocks and shares, as well as bonds, to provide the guaranteed level of income to members in retirement.

The increased deficit is due to falling stock markets, for example the FTSE all share fell 6% in September as well as lower bond yields, which fell by 0.5%. However, the figures do not take into account the most recent falls in gilt yields following the Bank of England’s announcement of further Quantitative easing measures last week.

Falling gilt yields have a significant effect on pension funds; the PPF has calculated that a 0.1% fall in gilt yields increases the deficit in company pensions by 2%.

The highest deficit on record was £208.6 billion in March 2009 when the UK economy was in the grip of a deep recession.

Emergency meeting

The National Association of Pension Funds (NAPF) has called for an emergency meeting with the UK Pensions Regulator who oversees funding levels in company schemes.

Joanne Seagers chief executive of the National Association of Pension FundsJoanne Seagers (right), chief executive of the NAPF, said: “QE makes it more expensive for employers to provide pensions and will weaken the funding of schemes as their deficits increase.”

She continued: “All this will put additional pressure on employers at a time when they are facing a bleak economic situation.”