(June 12, 2012) — The aggregate deficit of pension funds in the United Kingdom has reached its lowest point since records began seven years ago, data has shown.
The Pension Protection Fund (PPF), the lifeboat for bankrupt company funds in the UK, said the combined deficit across the industry had ballooned from £216.8 billion at the end of April to £312.1 billion at the end of last month. A year earlier the deficit was £24.5 billion.
This month’s snapshot shows the lowest point the organisation’s 7800 Index has recorded since the PPF was launched in 2005. The average funding ratio also hit record lows at 76.8% – down from 82.6% in April, which was already edging close to a record low. In May last year, the average funding ratio was 97.6%.
One record that remains intact, however, is the number of funds in deficit. At 5,503 funds in the red, there are slightly fewer than in March 2009, when there were 6,637 in that state, an increase from 6,507 one month earlier.
The main driver for this downturn in funding has been the fall in gilt yields, against which liabilities are measured.
In a report to accompany the figures, the PPF said: “Over the month, 15 year gilt yields fell by 55 basis points, which resulted in liabilities increasing by 7.6%. The large rise in gilt prices offset nearly all the deterioration in equity markets, with assets falling by only 0.1%. Over the year to May 2012, 15-year gilt yields were down by 173 basis points and the FTSE All-Share Index fell by 11.3%.”
Gilt yields have been forced down, mainly due to the Bank of England’s Quantitative Easing programme, which has kept up demand through buying much of the country’s newly-issued sovereign debt.
Joanne Segars, Chief Executive of the National Association of Pension Funds, said: “Quantitative Easing and international investors seeking a safe harbour from the Euro storm have contributed to a sharp drop in gilt yields. That gilt fall has fuelled this record deficit, which is more a reflection of accounting rules on pensions rather than any structural weakness. Pension fund assets are actually higher than 12 months ago, but liabilities have risen disproportionately. This is a volatile monthly index and it is important to remember that pension funds work over a long timeframe that helps absorb the effects of market swings.”
Yesterday, Bank of England official Adam Posen suggested central banks should look into buying different assets to get economies moving again, including corporate debt, which could help companies struggling to obtain credit from the banking sector.
A fall in inflation has helped pension funds slightly, according to investment consulting firm Mercer. The company said this week that a fall in the Retail Price Index last month had lowered liabilities (on an accounting basis) and had helped offset the fall in both gilt and corporate bond yields so far this year.