Record defined benefit pension scheme deficit reported in December

The PPF, which pays compensation to members of defined benefit schemes if their employers go insolvent, said that the collective deficit of the 6,533 schemes that it tracked rose to £255.2bn at the end of December from £222.1bn in November. In total, 5.473 pension schemes were in deficit – 83 more than in the previous month.

The schemes recorded a combined surplus of £21.7bn this time last year, according to PPF figures. However, it noted that a change in the assumptions used to calculate the figures, which took effect in April last year, had had an affect on the total.

The difference between member pension schemes' assets and their liabilities was due to falling interest rates, affecting the value of scheme investments, and the Bank of England's quantitative easing programme, the PPF said.

Its PPF 7800 Index (7-page / 95KB PDF), issued monthly, is based on the combined section 179 liabilities of the defined benefit pension schemes potentially eligible for entry to the PPF.

This refers to the liabilities schemes have under section 179 of the Pensions Act 2004 which broadly represent the premium that scheme would have to pay to an insurance company to cover a payout that matches the level of compensation its members are entitled to receive from the PPF, which may be lower than the full scheme benefits.

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.

An industry report revealed in December that nearly one quarter of existing defined benefit schemes are now closed to future contributions as companies struggle to manage rising costs. Last week, oil group Shell became the last company in the FTSE 100 to close its final salary scheme to new members.

Simon Tyler, a pensions law expert with Pinsent Masons, the law firm behind Out-Law.com, explained that falling interest rates have an impact on the way actuaries calculate the current cost of the benefits those pension schemes will have to pay out in the future.

"Occupational pension schemes are certainly feeling the double brunt of poor markets and falling interest rates," he said. "The pensions industry hopes that the Pensions Regulator will recognise this and exercise leniency when it comes to assess proposals made by employers and trustees to fund their schemes."

Joanne Segars, chief executive of industry body the National Association of Pension Funds (NAPF) said that the figures were a "stark and painful reminder" of the burdens defined benefit schemes placed on the private sector.

"Low interest rates, a faltering economy and the side-effects of quantitative easing are all to blame for the rise in liabilities. The Pensions Regulator needs to help pension funds deal with quantitative easing by giving them some breathing space," she said.

Recovery periods, smoothing valuation results and postponing annual pension valuation dates should all be considered by the regulator, she said.

However, Segars stressed that it was the way in which pension liabilities are measured rather than the actual amounts that they have to pay out that had seen such a dramatic change in the figures.