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Shortfall in pension plans worsens

12:56pm Tuesday 9th February 2010

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The shortfall faced by company pensions worsened during January as turbulent stock markets hit the value of schemes' assets, figures have shown.

The UK's nearly 7,400 defined benefit schemes had a collective deficit of £51.9 billion at the end of January, up from a shortfall of £32.6 billion at the end of December.

The deterioration in the funding position was caused by a 1.8% drop in the value of the assets held by schemes due to slides in UK and global stock markets.

There was also a 0.7% increase in the liabilities pension schemes faced, partly due to a change in gilt yields.

The combination of these factors left three out of four pension schemes in the red at the end of January.

But despite the increase in the deficit during the month, it was still only a fraction of the £183.6 billion shortfall schemes had faced in January 2009.

The improvement has been caused by a combination of new accounting assumptions, and a 15.4% rise in the value of assets held by schemes due to rising stock markets during the past 12 months.

John Ball, head of defined benefit consulting at Towers Watson, said: "A big question over the coming months will be whether the amount of money the Government needs to borrow forces it to pay much higher interest rates.

"If so, that will be bad news for taxpayers, but will increase the returns that pension funds get from safer investments and therefore make their liabilities look smaller."

But even if pension scheme liabilities do fall, it is unlikely to halt the current trend for companies to close their defined benefit schemes to new members, as the pensions continue to be expensive to offer due to investment volatility and increased life expectancy.

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