Inflation saves deficits of UK pension funds

Empty-pocketUK pension schemes narrowly avoided their deficits staying at the highest level for two years in May thanks to a reduced outlook for inflation.

The accounting deficits in FTSE 350 companies recovered even though corporate bond yields fell sharply, which would normally push up pension scheme deficits.

The accounting deficit of £72 billion (€89 billion) at 31 May meant FTSE 350 pension funds had an 87% funding ratio of assets over liabilities.

It was the fall in the market’s outlook for inflation measured by the Retail Price Index (RPI) that helped deficits recover from the effects of falls in long-term interest rates and stock markets, according to the Pensions Risk Survey published by Mercer, a pension scheme consultancy.

The deficit was broadly unchanged over the month – yet turbulence in markets saw deficits peak at around £94 billion in mid-May, corresponding to a funding ratio of 84%.

The April funding level was 88%. At the end of December 2011 it was 89%.

Ali Tayyebi, senior partner and pension risk group leader, said: “During the first half of the month the aggregate deficit had increased by £25 billion to around £94 billion – putting it on track to be one of the worst months since August 2010, with deficits back to levels last seen two years ago.

“This was the direct impact of the renewed concerns around Greece’s economic future which in turn promoted the perceived safe haven status of UK gilts and high quality corporate bonds.”

©2012 funds europe