Page last updated at 12:28 GMT, Tuesday, 9 December 2008

Pension scheme deficits balloon

Pensioners in Parliament Square, October 2008
Protesting pensioners demand a higher state pension

The collective deficit of the UK's final salary pension schemes has shot up by 40% in the past month.

The Pension Protection Fund (PPF) says their deficit went up from 97.3bn at the end of October to 136bn at the end of November.

The PPF said this was mainly due to a sharp increase in the cost of providing pensions and also falling share prices.

Meanwhile a leading firm of actuaries has forecast another wave of pension scheme closures in the next few years.

"Over the past year, the falling equity markets and bond yields have led to an overall worsening of the funding position," the PPF said.

The snapshot suggests that 86% of final salary schemes are now in deficit, compared to 69% a year ago.

Volatile finances

Each month the PPF calculates the financial position of nearly 7,800 mainly private sector final salary pension funds.

The financial turmoil and subsequent recession is expected to drive pension plan design changes that will reduce costs and risks
Watson Wyatt

The value of their assets is very volatile, depending on the rise or fall in share prices and other assets such as government and corporate bonds.

Their market value has to be set against an estimate of the amount of money the schemes need in order to pay not only current pensioners, but the pensions that have been accrued by people yet to retire.

If the current value of the assets outstrips these liabilities then schemes are in surplus; if not then they are in deficit.

"During the month of November 2008 there was a 0.5% decrease in assets due to falling UK and global equities," the PPF said.

"Meanwhile, lower gilt yields in general led to an increase in liabilities of approximately 5.2%," the PPF explained.

Scheme closures

The past year has been one of exceptional turmoil in the financial markets because of the international credit crunch and the impending world-wide recession.

The PPF pointed out that UK shares, as measured by the FTSE all-share index, have dropped in value by 35% in the past twelve months.

This worsening position has led to increasing concerns that many employers will not be able to make the extra payments likely to be required of them to bring their pension funds back into balance.

A survey by the actuarial firm Watson Wyatt, of 160 companies or their pension schemes, found that 40% of those which are currently still open to new joiners will shut to new entrants in the next three years, as employers seek to rein in their pension costs and provide cheaper pension arrangements for their staff.

And 25% of schemes which are already closed to new joiners will shut to current members as well, which would mean that people already in such schemes would stop accruing additional benefits.

"The financial turmoil and subsequent recession is expected to drive pension plan design changes that will reduce costs and risks, with schemes closing to new entrants, closing to future accrual for existing members or making other changes to reduce costs," said the actuaries.

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