Pension schemes' deficit worsens

Continuing volatility in the financial markets has a big impact on funds

The funding position of final salary pensions deteriorated sharply last month, according to the Pension Protection Fund (PPF).

The PPF's monthly snapshot of pension scheme finances showed that in December the UK's 7,800 defined benefit schemes had a total shortfall of almost £20bn.

That deficit has more than tripled from the £5.2bn recorded in November 2007.

The decline is party due to lower gilt yields, which have offset the recent slight improvement in share returns.

Volatility

According to the PPF, 6,131 defined benefit pension schemes were in deficit in December 2007, up from 6,014 the previous month. At 79%, that represents the highest proportion in the red since November 2006.

At the same time only 1,619 schemes - or 21% - were in surplus, down from 1,881 a month earlier.

The funding position of pension schemes is highly volatile.

With growing scrutiny and pressure on pension scheme trustees...they are increasingly viewing diversification as normal practice Joanne Segars, NAPF

The total effect of recent movements in the financial markets has reduced the value of pension scheme assets and increased the value of their liabilities - the amount of money they need now to generate the cash required to pay pensioners in the future.

The impact of changes in the share and bond markets during December pushed the 6,131 schemes facing a shortfall further into the red, from £73bn to £82bn.

Meanwhile the combined surplus of those 1,619 funds that were in surplus shrank from £68bn to £63bn.

The overall position of pension schemes is now worse than it was at the end of 2006, when schemes were over-funded by more than £8bn.

However, despite the recent deterioration, pension scheme finances have generally been on an upward trend since 2002, when the deficit stood at more than £150bn.

Diversification

Separately new research by the National Association of Pension Funds (NAPF) shows pension funds are continuing to diversify, with fewer assets invested directly in shares.

NAPF's latest Annual Survey of UK pension schemes revealed only 55% of scheme assets were invested in shares in 2007, compared with 60% in 2006.

Meanwhile just under a third (29%) of fund monies were invested in fixed interest assets such as gilts and bonds, an increase of 3% on the previous year.

"With growing scrutiny and pressure on pension scheme trustees to make sure there is a balance between risk and return, the survey shows they are increasingly viewing diversification as normal practice," said NAPF chief executive, Joanne Segars.