PPF Reveals UK Pension Fund Deficits Swell

(October 11, 2011) — Defined benefit schemes in the UK have dropped £80 billion ($125 billion) deeper into deficit in September, according to the Pension Protection Fund (PPF), which monitors all schemes paying a levy to the lifeboat fund to assess the risks it is exposed to.

The result: More than 80% of final-salary schemes in the private sector are now suffering from a void in funding, fueled by falling equity markets that have reduced asset values and raised liabilities for pensions.

Some highlights from the report by the PPF 7800 index, which tracks all schemes paying a PPF levy:

1. The aggregate deficit of the 6,533 schemes in the PPF 7800 index is estimated to have increased to £196.4 billion at the end of September 2011, from a deficit of £117.5 billion at the end of August.

2. The funding ratio fell from 89.2% to 83.1%.

3. Total assets were £963.8 billion and total liabilities were £1160.2 billion.

4. There were 5,345 schemes in deficit and 1,188 schemes in surplus.

The fund noted that the aggregate deficit of all schemes in deficit at the end of September is estimated to have increased to £220.9 billion from £154.0 billion at the end of August 2011. At the end of September 2010, the equivalent figure was £95.7 billion.

In comparison, the total surpluses of schemes with a surplus decreased to £24.5 billion from £36.5 billion at the end of August 2011. At the end of September 2010, the total surplus of all schemes in surplus stood at £55.5 billion.

Perhaps shedding some light on the dismal deficit outlook among UK schemes, the National Association of Pension Funds (NAPF) warned last week that the financial state of pension funds could be negatively impacted following the Bank of England’s unleashing of £75 billion of emergency funding.

In the move dubbed QE2, the UK’s Monetary Policy Committee (MPC) voted to boost the Bank’s quantitative easing (QE) program from £200 billion to £275 billion while holding interest rates at 0.5%. Quantitative easing generally reduces yields on long-term bonds.

In response to the Bank of England launching QE2, Colin Robertson, Global Head of Asset Allocation at Aon Hewitt, revealed a negative outlook for pension funds, telling aiCIO:  

“While it is understandable that the Bank of England has opted for a second round of Quantitative Easing in the context of other measures available, there will be a major unintended consequence of this action.” He continued: “Already under stress from historic lows in gilt yields, the UK’s pension funds would undoubtedly find that, by depressing yields even further, QE2 only exacerbates pension funding problems. This stands to place even more of a burden on UK companies already buckling under the weight of the pension promise, with implications for employment and hence the economy.”