UK Pensions Hit Record Deficit, No Let-Up in Sight

(January 10, 2012)  —  The shortfall of pension schemes in deficit in the UK hit record shortfalls last year due to a perfect storm of poorly performing assets and rising liabilities, data has shown today.

The aggregate shortfall of pension schemes in deficit more than quadrupled over the twelve months to the end of December – from £61 billion in 2010 to £277 billion last month – figures from the Pension Protection Fund (PPF) showed today. The PPF acts as a lifeboat for bankrupt company schemes and tracks corporate pension scheme funding in the UK.

Previously, the record deficit had been £253 billion, which was reached at the end of March 2009 in the aftermath of the collapse of Lehman Brothers and immediate stock market meltdown.

John Belgrove, principal at investment consultant Aon Hewitt, said: “It is no surprise the deficit has increased – it reflects market circumstances. There has been a further decline in real yields – which are used to measure liabilities – and risk assets did not perform over 2011.”

In the 12 months of 2011, the MSCI World Index fell by 7.21%. MSCI’s UK index fell by 6.12%.

Corporate bond yields also fell over the year, which helped corporations on one hand as it reduced potential interest payments, but on the other hand, it pushed up pension liabilities, against which they are measured.

Belgrove said: “Pension schemes are in a difficult position – but they must remember that these deficits do not have to be filled by next week. Patience, driving assets, and managing risks are what they are going to have to live by over the next few years.”

The PPF also reported some of the lowest levels of surplus for those schemes still in the black. At the end of December, the surplus of these schemes was only £22 billion. In mid-2007, this number had been over £150 billion.

The record lowest surplus was in March 2009 when the number fell to £11 billion.

The PPF uses one of the toughest methods to value pension scheme deficits. It calculates what would be needed to buyout the scheme.

Last week, investment consultant Mercer showed pension scheme deficits from all schemes in the UK had tripled over 2011 to hit £84 billion, up from £61 billion a year earlier.

Belgrove urged scheme trustees and investment managers not to panic and warned the worst was not over.

He said: “In the short term, things might get worse – especially until the Eurozone crisis is resolved. Expect higher real yields in the medium term, but in the short term, they are likely to sink even lower.”