Pension fund deficits fall back

Final salary schemes have become much weaker in the past year

The position of the UK's private sector, final salary, pension schemes improved slightly in January.

The Pension Protection Fund (PPF) said their collective deficit shrank from £195bn in December to £191bn.

However their position was still far worse than a year ago when the deficit was just £49bn.

The PPF said 90% of the nearly 7,800 schemes it measured were now in the red, with only 812 schemes - 10% - still in surplus.

That compared to 6,924 schemes which were still in the red.

Falling share prices

The PPF explained that in the past month the value of pension fund assets had fallen by nearly 4% due to further falls in UK and international share prices.

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

However this had been outweighed by a rise in the yield on government bonds, which meant that the cost of paying for pensions in the future had become cheaper.

In the past year though, the funding of final salary schemes has become much worse.

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

"Lower bond yields resulted in a 6.5% increase in aggregate liabilities, while weaker equities have reduced assets by 14.5%," it added.

More insolvencies

The surge in company insolvencies seen in the past year, brought on by the recession, will put further pressure on the PPF.

Its own investment fund, which it uses to finance the payout of its benefits to rescued pension scheme members, is already running with a deficit of more than half a billion pounds.

The numerous high profile company failures, such as Woolworths and Nortel, involve tens of thousands of workers and will lead to their pensions schemes eventually being taken on by the PPF.

The PPF absorbs the assets of those schemes it takes on, thus every rescue increases its own liabilities.

To stop its own funding gap becoming too large, the PPF may have to raise the annual levy it imposes on solvent pension schemes to pay for its activities.

Alternatively it could cut the level of benefits it pays out.