Alarm as Scottish pensions deficit tops £10bn

Published on Saturday 31 October 2009 13:56

SCOTLAND'S final salary pension scheme deficit has hit £10 billion, with the growing shortfall largely due to the distorting effect of quantitative easing (QE) on stock markets.

Analysis by Buck Consultants has revealed that deficits in the schemes of the country's biggest companies increased by about 1.6 billion during August and September on the back of movements in markets.

Fraser Smart, a Buck director, said that during those two months the stock market continued one of its biggest short-term rallies in more than 22 years.

This led to a 12 per cent increase in share values. The value of fixed interest bonds – debt issued by companies and the government – also rose by around 7 per cent.

Overall, this led to an estimated rise of 3.4bn in the value of pension scheme assets.

However, liabilities – the estimated cost in today's terms needed to meet all future benefit payments – spiralled due to a sharp decrease in yields on corporate bonds.

The result was that liabilities were pushed up by about 5bn, leading to growing deficit, with Buck saying that QE is to blame.

It said that in the past quarter, the fall in the yield on good quality corporate bonds had had the greatest impact on the overall funding of pension schemes.

In its latest quarterly bulletin, published in September, the Bank of England indicated that it did not buy any corporate bonds in its last round of QE in late July and early August. This suggests that the fall in the yields on corporate bonds may be mainly due to market sentiment that the value of company debt had been written down further than it should have been.

Smart said: "This means the market expected there to be more defaults than there have been."

Pension scheme trustees will be concerned about the impact an expected increase in QE from 175 billion to 200bn will have in the coming months.

A report published this weekend by Axa on pensions also makes for gloomy reading.

It reveals that poverty among the elderly is set to rise, with 64 per cent of UK workers looking to rely on the state in retirement as company pension scheme membership falls.

Axa said UK comes out "bottom of the pile" in G7 for state pension provision and is calling for a review of the structure of the UK pension system.

In the UK, the state pension is worth just 31 per cent of the nation's average earnings – less than half that of the Italians who retire with a state pension worth 68 per cent of average earnings.

Despite this, Axa found that 64 per cent of UK residents intend to rely on their state pension in retirement as more workers move away from occupational pension schemes.

Steve Folkard, head of savings and pensions policy at Axa, said: "There has to be a concerted, coordinated effort to make sure that people are adequately provided for, or we will inevitably be faced with a pensions dark age."