Negative interest rates increase underfunding in UK schemes

Pensioner-with-caneThe deficit in UK defined benefit (DB) pension schemes has grown by £100 billion (€138 billion) over the past year as more countries sell negative yielding debt, research shows.

According to JLT Employee Benefits, the deficit now stands at £255 billion on an IAS19 accounting basis.

At February 28 this year, the deficit in FTSE 100 pension schemes was £85 billion (£53 billion a year before) and their funding level was 87%.

For FTSE 350 companies the deficit was £97 billion (£61 billion a year before) and the funding level was also 87%.

For all UK private sector schemes the deficit £255 billion deficit leaves their funding levels at 83%.

Charles Cowling, director at the firm, says that in the last few weeks Germany, France and Finland have all been able to sell negative yielding debt with terms of up to five years and this, in turn, is putting huge pressure on insurance companies and pension schemes with fixed liabilities.

It also leaves them with "ever fewer" opportunities for generating the levels of low-risk investment returns that are needed to meet their liabilities.

"The Alice in Wonderland world of negative interest rates seems to be expanding, spreading from Switzerland right across the Eurozone," he says.

He warns that even lower interest rates in the UK could prove particularly problematic for pension schemes with actuarial valuations in 2015.

"Demands from pension scheme trustees for more cash payments into DB pensions look set for significant escalation in 2015."

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