Page last updated at 16:03 GMT, Tuesday, 10 November 2009

Pension fund deficits 'slashed'

Striking Grangemouth oil refinery workers in 2008
Pension scheme closures, partly due to rising deficits, have been controversial

The collective deficit of the UK's private sector, final-salary, pension schemes has been slashed by 34% in just one month.

The combined deficit of 7,400 schemes fell last month from £149bn to £98bn.

The change has been caused by the Pension Protection Fund (PPF) altering the assumptions it uses to calculate scheme surpluses and deficits.

The PPF said it had become cheaper for schemes to buy guaranteed pensions for their members from insurance companies.

This is one of the key comparisons it uses to work out how much it would cost to provide pensions for members of schemes that go bust.

If the PPF had not changed its financial assumptions in October, then the deficit of the schemes would in fact have risen by £20bn to £169bn, because of a combination of falling share prices and lower returns on government bonds.

Bond yields

The PPF asked insurance companies this summer how much they were quoting to pension schemes to sell them bulk annuities - policies guaranteeing to pay their pensioners their pensions.

The feedback was that the cost of providing these annuities had fallen in the past year because the prices of corporate bonds, in which annuities are heavily invested, had gone down.

This has had the knock-on effect of increasing the yield, or return, on holding these bonds.

And that means that anyone seeking a guaranteed return to pay pensions, for many years in the future, does not have to put quite as much aside to cover the cost.

Other smaller changes made by the PPF have been to assume that pension schemes will pay pensions to fewer married couples, and also to assume that male pensioners will live longer than previously thought.

Overall, the effect of the new PPF financial assumptions has been to knock £71bn off the theoretical value of assets needed by final-salary schemes to fund their pension promises.

Recovery plans

Separately, the Pensions Regulator has found that employers are planning to take longer to pay off any deficits in their pension schemes.

In its annual report on pension scheme recovery plans, the regulator found there had not been any significant increase in the number of new recovery plans that it thought needed to be scrutinised to make sure they conformed to its rules.

But it did find that recovery plans tended to be spread over a longer period - just over eight years, compared to six years before - with more of the money being "back-end loaded"; in other words, paid off towards the end of the plan.

Under laws introduced in 2005, employers must put plans in place to inject more money into their schemes if they are in deficit.

Earlier this year, the regulator said it was happy for pension scheme trustees to be flexible in the plans they agreed, as they would have to take account of the stretched finances of firms during the recession.

The regulator also found that while schemes were now using more prudent assumptions about how long people will live, they were also anticipating an improvement in the returns their schemes earned from their investments.

Pension deficits

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