Shortfalls in benefit plans hit new highs

RISING inflation expectations and lower corporate bond yields helped to push up pension deficits at the UK’s biggest companies to the highest level seen this year, new data today shows.

The funding gap in defined benefit schemes for all companies in the FTSE 350 rose to £80bn at the end of November, up by 25 per cent in only one month from the end of October, Mercer said in its Pensions Risk Survey.

The corporate pension schemes had gross liabilities of £553bn at the end of November, made larger as the corporate bonds they bought to discount the liabilities delivered lower than expected yields.

At the same time, asset values increased only slightly due to higher bond prices, and gains were held back by a fall in stock markets in the UK and abroad.

The shortfall shows companies on average had 86 per cent of their liabilities funded, down from 89 per cent a month ago and from 88 per cent at the end of last year.

Mercer senior partner Ali Tayyebi said funding levels fell as much as six per cent during November as volatility soared during the month.

“We are beginning to see the bad economic news catch up on the accounting numbers, which had so far been relatively protected in the midst of the general economic turmoil,” he said.

“If 30 November conditions are mirrored at 31 December then many companies will be seeing an increased deficit on their balance sheet at the year end.”

Tayyebi said demand for UK government bonds as a safe haven from the Eurozone crisis was creating a “relentless fall in gilt yields”, which when combined with quantitative easing, was bringing down high quality corporate bond yields.

Mercer partner Adrian Hartshorn said firms were trying increasingly non-traditional strategies to try to reduce long-term risk.

“Companies and pension scheme trustees are looking at scenario analysis to help them plan actions for those scenarios which they are most worried about,” he said.