Out-Law News 1 min. read

Majority of pension schemes in debt as combined deficit soars


More than 80% of UK corporate pension schemes are in debt to a combined figure of almost £200 billion, according to industry figures.

The Pension Protection Fund (PPF), which pays compensation to members of pension schemes if their employers go insolvent, said that the defined benefit pension schemes that it tracked had gone into debt by a further £80bn over September 2011.

The total deficit of the 6,533 in the PPF 7800 Index (7-page / 86KB PDF), which tracks all schemes contributing to the fund, is estimated to have increased to £196.4bn by the end of the month from a deficit of £117.5bn at the end of August.

The deficit was only £40.2bn at the same time last year. In total 5,345 of the schemes it tracked were in deficit, the PPF said.

The PPF is funded by eligible defined benefit pension schemes, which are schemes that promise a set level of pension once an employee reaches retirement age no matter what happens to the stock market or the value of the pension investment. It pays compensation to scheme members whose employers have become insolvent, meaning that they can no longer afford to pay the pensions they promised.

The PPF said that falling equity markets had reduced the value of pension investments while the falling value of government bonds had raised the liabilities of the schemes. The FTSE all-share index fell by 6.1% over September, while gilt yields were down 53 basis points.

Pension law expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that the development was "not unexpected" given the continuing fall in the value of shares.

"This will put more pressure on companies with defined benefit schemes to address their deficits," he said.

The new figures do not take into account the Bank of England's recent extension to its programme of quantitative easing. The Bank has committed to inject a further £75bn into the economy, which will reduce yields further while reducing the return on pension scheme investments by depressing interest rates.

Last week UK pension funds called for an emergency meeting with the Pensions Regulator to discuss ways of protecting UK pensions from the negative effects of quantitative easing. Joanne Segars, chief executive of professional body the National Association of Pension Funds (NAPF) warned that quantitative easing had adverse consequences for pension funds in the short term.

"Quantitative easing makes it more expensive for employers to provide pensions, and will weaken the funding of schemes as their deficits increase," she said.

We are processing your request. \n Thank you for your patience. An error occurred. This could be due to inactivity on the page - please try again.