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Last Updated: Monday, 10 September 2007, 15:11 GMT 16:11 UK
Pensions dented by banking crisis
Lawrence Churchill, PPF chairman
Lawrence Churchill, PPF chairman
The finances of the UK's final salary pension schemes have been dented by the bank lending crisis, the Pension Protection Fund (PPF) says.

The fund, which bails out failing schemes, said falling bond yields amid worries about loan losses had hit the collective surplus of 7,783 schemes.

The surplus fell from 51bn in July to 27bn in August, the PPF said.

However, the fund pointed out this was still healthier than in August 2006, when there was a deficit of 41bn.

Bond yields

The "PPF 7800 Index" benchmarks the finances of pension schemes against the money that would be needed to pay an insurance company to take on the schemes - and then pay out the PPF's own levels of compensation.

That in turn is calculated on the assumption that all the money would be invested in government bonds.

As their price in the bond market has risen during the recent bank lending crisis, with some investors seeking a safer and more predictable home for their money, so the percentage return, or yield, on those bonds has fallen.

The effect has been to increase the value of the bonds that pension schemes would need in order to produce the same stream of income in the future to pay the pensions.

Assets and liabilities

In August, says the PPF, this process pushed up the value of the pension schemes' total liabilities by 3.2%.

Widespread attention was given to the very sharp fall in the 100 share index in the first half of the month when it fell by 8%.

However by the end of the month almost all of that had been recovered.

Meanwhile the wider FTSE All-Share index, used in the PPF's calculations as a proxy for all the schemes' share investments, fell by just 0.9% in August.

Thus the 73% of schemes in deficit saw their collective shortfall expand from 45m in July to 65m in August, while the 27% of schemes in surplus saw that shrink from 96bn to 83bn.

The net result was a smaller overall surplus of 27bn, on total assets of all the schemes amounting to 823bn.

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