The aggregate shortfall of UK corporate pension schemes soared in September and is now at its second-highest level, new industry data show, as falling marketsand bond yields sharply reduced returns.
The UK’s Pension Protection Fund—the safety net for underfunded pension schemes at insolvent employers—said the aggregate deficit of all schemes soared to £196.4 billion ($306.16 billion) at the end of last month, from £117.5 billion at the end of August. It is not far off the record £208.6 billion shortfall in March 2009, at the depth of the recession .
The latest shortfall calculations do not take account of the sharp falls in yields on UK government gilts since the Bank of England announced the resumption of its securities purchases, or quantitative easing . The Bank intends to buy an additional £75 billion worth of gilts by early February.
Last week the National Association of Pension Funds called for an emergency meeting with the UK’s Pensions Regulator that oversees funding levels in company schemes.
Joanne Segars, NAPF chief executive, said that while the group understood the need for economic stimulus, quantitative easing posed particular problems for schemes by depressing bond yields .
She said: “QE makes it more expensive for employers to provide pensions and will weaken the funding of schemes as their deficits increase.
“All this will put additional pressure on employers at a time when they are facing a bleak economic situation.”
The PPF blamed market movements for the widening shortfalls. The FTSE All-Share Index fell by more than 6 percent last month, while long-term bond yields fell by an average of 0.5 of a percentage point.
The PPF calculates that a 0.1 percentage point reduction in gilt yields raises scheme liabilities by 2 percent.
The PPF tracks monthly changes in the aggregate shortfall or surplus at the company pension schemes it insures against default. The shortfalls it reports are much smaller than those companies actually incur, because only a portion of total promised benefits are covered by insurance.
Scheme members can lose up to 30 percent of promised benefits if an employer goes bust. For highly paid executives, the losses can be even larger.