Shortfalls on pensions hit high in June

PENSION deficits in the UK&rsquo;s 200 largest private final-salary schemes almost doubled in June to their highest level since January 2006 thanks to plummeting yields on corporate bonds, according to consultancy Aon.<br /><br />Aon said pension deficits rose from &pound;40bn to &pound;73bn last month.<br /><br />Pension funds invest heavily in corporate bonds as a means of generating income to fund payouts to policyholders.<br /><br />Final-salary pensions promise to pay out a regular retirement income based on an employee&rsquo;s final salary, regardless of any turbulence in the economy.<br /><br />Aon said that as well as having to make payouts to cover massive deficits on the schemes, the companies that offer them are now also faced with mounting pressure to switch out of higher-risk assets like corporate bonds and equities altogether. This is seen as one way of stemming massive losses.<br /><br />This means they are likely to have to shift the funds into areas like cash or government bonds, which provide even lower yields but have not tumbled in value so sharply in the current recession.<br /><br />The 200 largest defined-benefit pensions have now lost around &pound;50bn in assets under management since September 2007 due to falling values, Aon added.<br /><br />Aon Consulting actuary Sarah Abraham said while pressure to move out of higher-risk equities is growing, pension providers must think carefully before exiting the asset class as equities tend to provide returns that outpace inflation in the long-term.<br /><br />Meanwhile, insurer MGM Advantage said it estimates those UK employers who have closed their final-salary pension schemes are now saving &pound;4.5bn a year.<br /><br />Many groups have already shut their schemes in the face of rising deficits. There are now 2m fewer people in the schemes in the UK than 14 years ago, MGM said.