Pension deficits totalled £75bn at the end of last month, according to data put out by Mercer yesterday, with assets adding up to only 88 per cent of liabilities. This was up from £62bn at the end of December, which represented a funding ratio of 89 per cent.
One major contributor to the widening gap was the Office for National Statistics’ (ONS) shock decision not to change the retail prices index (RPI) formula, which the markets had priced in.
This pushed up long-term expectations of RPI, therefore driving implied liabilities on defined benefit schemes – which have to be discounted with RPI – to £610bn from £588bn.
Assets increased just £9bn, or 1.7 per cent, from £626bn to £635bn, Mercer said, despite a 6.5 per cent rise in the FTSE 100 index.
“On 10 January the ONS announced that it did not recommend any material change to the RPI calculation,” said Ali Tayyebi at Mercer. “Immediately after this announcement we reported that pension deficits were estimated to have increased by £20bn.
“This reflected an increase of approximately 0.3 percentage points in the market’s view of long-term RPI inflation.”