Private sector pensions hit £222 billion deficit
Private sector final-salary pension deficits have increased collectively by £63.5 billion, from £158.6 billion at the end of October to £222.1 billion at the end of November.
The figures, published by the Pension Protection Fund (PPF), reflect the increasing cost of paying for pensions which outstripped a 0.7 per cent month-on-month increase in the value of pension fund assets.
The cost of pensions is increasing due to poor returns on pension fund investments, particularly government bonds, or gilts as they are known.
When inflation is taken into account, the interest rates on UK government bonds are now negative.
The PPI reported that 5,390 defined benefit pension schemes, which promise to pay out a certain sum each year upon reaching retirement age, were in deficit, while just 1,143 schemes recorded a surplus.
In related news, new figures from This is Money and The Better Retirement Group show that pension payouts have fallen 10 per cent since summer.
This means that people retiring now will receive thousands of pounds a year less that those who retired just five months ago.
Just Retirement director, Steve Lowe, said this year represented ‘one of the lowest points’ in pensions history.
Annuity rates have fallen by 9.36 per cent over six months because they are closely linked to the yield on gilts, which offer relatively stable returns and carry a minimal risk of default.
However in the face of the eurozone crisis European and US investors have been turning to gilts, causing demand to soar.
Meanwhile the Bank of England has been buying gilts under its quantitative easing programme and therefore reducing supply.
These two factors have together substantially reduced gilts’ yields, effectively crippling the annuity market.
Anyone planning to purchase an annuity is advised to seek professional financial advice.
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