UK pension deficits hit 2011 high of 80 billion pounds - Report

Tuesday, 6 December 2011 00:05 - - {{hitsCtrl.values.hits}}

LONDON (Reuters): Funding deficits of UK pension schemes rose 33 percent to 80 billion pounds at the end of November, hitting their highest level this year as both corporate bond yields and stock markets fell, a survey showed on Monday.

The report by consultancy firm Mercer showed accounting measures of defined benefit pension schemes in the UK showed a deficit of 80 billion pounds, equivalent to a funding ratio of 86 percent, as of November 30.

This compares with a deficit of 60 billion pounds with a funding ratio of 89 percent at end-October.

Corporate bond yields, which are used to discount liabilities, fell in line with government bond yields. UK and other world stocks fell slightly. But higher market price of corporate bonds and gilts helped asset values rise slightly, Mercer said.

“We are beginning to see the bad economic news catch up on the accounting numbers which had so far been relatively protected in the midst of the general economic turmoil,” said Ali Tayyebi, senior partner and pension risk group leader at Mercer.

“The relentless fall in gilt yields, due to the euro zone debt crisis and quantitative easing in the UK, is now also pushing down the real yield on high quality corporate bonds. If Nov 30 conditions are mirrored at Dec 31 then many companies will be seeing an increased deficit on their balance sheet at the year end.”

Pension funds -- which globally control $35 trillion -- are facing a deficit crisis.

At the heart of their problems is a steady move by these funds to cut exposure to risk after the financial crisis.

But this “de-risking” are depressing their long-term returns from stock market investment and also lowering yields, increasing liabilities.

Many defined benefit(DB) pension plans -- where benefits are pre-determined -- pay a fixed stream of income to retirees.

The low-yielding environment makes it harder for the funds to meet these bond-like liabilities, forcing them to accumulate even more fixed income instruments to try to meet their obligations, creating a vicious circle.