UK corporate pension deficits have ballooned to £100bn and are set to rise further over the next few years following the austerity measures in last month’s Budget, a pension specialist has warned.
The aggregate pension fund deficit shown in company accounts for the UK’s 200 largest privately-sponsored pension schemes increased from £88bn in May to £100bn at the end of June, according to Aon Consulting.
Reduced issuance of government securities (gilts) relative to previous expectations, combined with slower economic growth, are both likely to reduce the yields available on gilts and so increase the value placed on final salary scheme liabilities, Aon said.
A 0.5% fall in gilt yields would increase the value of the Aon200 final-salary scheme liabilities by about £43bn to £143bn, it added.
But in the longer term, corporate pension deficits for final-salary schemes should shrink if the tough economic measures are successful and the economy improves, Aon also predicted.
“Over the longer term as the economy recovers, final salary pension funds should be one of the key beneficiaries,” said Marcus Hurd, head of corporate solutions at Aon Consulting. “The immense importance of gilt yields to pension funds is such that a small change can have a dramatic effect. The economic recovery could be the saviour of the UK private sector pensions debt.”
Pension schemes have become a major financial burden for companies and many have closed more generous final salary schemes in an effort to cut costs.
Research published last month by professional services firm PricewaterhouseCoopers predicted that the trend for closing final-salary pension schemes will continue.
Separate research has found that final salary pension deficits were making it more difficult for companies to recover from the recession and be competitive.