Final salary pension deficits widen by £1bn on inflation and bond yields

Published on Saturday 5 September 2009 13:46

MISERY continues for Scottish final salary pension schemes which saw their shortfall jump by £1 billion during July.

Analysis by Buck Consultants for Scotland on Sunday has revealed that scheme deficits widened as a result of further increases in expected inflation and a fall in yields on corporate bonds.

At the start of July it was estimated that the pension schemes had shortfalls totalling 7.4bn but this had jumped to 8.4bn by the end of the month. Pension scheme liabilities are the estimated cost in today's terms needed to meet all future benefit payments. Scheme benefits are largely linked to increases in price inflation so that a pension retains the same purchasing power once it is in payment. Therefore, the value of future benefit payments also depends on the rates of future price inflation.

Buck Consultants director Fraser Smart said: "Despite the increased market optimism that the worst of the recession may be over, the continuing falls in the yield on good quality corporate bonds are still pushing liabilities up."

He said the past few months had seen increased demand for corporate debt, which had caused the yield on corporate bonds to fall. He added that this may be partially due to market sentiment that the value of company debt had been written down further than it should have been and to the Bank of England's quantitative easing.

Smart said: "As the year end draws closer many finance directors will be concerned about the impact of current financial conditions on their company balance sheets."

Further bleak news on pensions comes from benefits and investment consultant Hymans Robertson.

It has warned that the Pension Protection Fund (PPF), a safety net to protect investors, could reveal a deficit of 188bn on Tuesday.

This would be an increase of 30bn on the figures reported in early last month.

Martin Potter, Partner at Hymans Robertson, said: "The figures emphasise the problems facing the PPF, which is set to become one of the biggest schemes in the UK in the coming years."