£80 billion pension deficit revealed
UK pension schemes were hit by a fall in both corporate bond yields and stock markets in November, with their funding deficit growing by a third to £80 billion.
According to a report by consultancy firm Mercer, the deficit has reached its highest level this year, rising from a deficit of 60 billion pounds at the end of October.
November’s £80 billion deficit represents a funding ratio of 86 per cent and threatens the future of final salary pension schemes.
With the current crisis in financial markets making it unlikely that the deficit can be rectified by better returns, just 21 per cent of private sector final salary schemes are still open to new members and more are expected to close.
The eurozone debt crisis has caused gilt yields to plummet and the Bank of England’s quantitative easing programme has had an adverse impact on corporate bonds.
The cost of final salary schemes, which pay a fixed amount to retirees, increased substantially following the abolition of corporation tax relief in 1997 and the creation of the Pension Protection Fund under the Pensions Act 2004.
The fund, which compensates members of an eligible scheme in the event of a company becoming insolvent, is partly funded by compulsory annual levies.
It is estimated that final salary pension schemes are 44 per cent more expensive than they were in the Seventies.
Many companies are seeking to replace final salary schemes with defined contribution pensions which give retirees a payout based on the amount of money saved and the performance of investments.
In related news, the Chancellor, George Osborne, is trying to encourage pension funds to invest in a £30bn infrastructure programme.
The government plans to invest £5 billion in the programme by 2014-15 and hopes to attract £20 billion of investment from major UK pension funds.
It is also seeking infrastructure investment from insurance companies and from China.
A number of projects would benefit from the programme including motorway improvements and railways.