Boost for defined benefit pensions
Updated on 10 November 2009
The funding shortfall faced by defined benefit pension schemes fell significantly during October following the introduction of a new accounting regime, figures show.
The UK's nearly 7,400 defined benefit pensions, including final salary schemes, had a £97.6 billion deficit at the end of the month, down from a £148.9 billion funding blackhole in September.
But pensions safety net the Pension Protection Fund said the improvement was caused by the introduction of new financial assumptions used in the valuation of pension schemes which reduced their liabilities by around £71.2 billion.
It added that without the introduction of the new regime, the funding shortfall schemes faced would actually have increased by £19.9 billion to £168.8 billion due to stock market falls during the month.
Even once the new valuations are taken into account, pension schemes still have a bigger deficit than they did in October 2008, when their collective shortfall stood at £77.6 billion.
Around 79.5% of pension schemes were not fully funded at the end of October, compared with 84% in September.
The value of pension schemes' assets have increased by 13.6% during the year to the end of October.
But this gain has been more than offset by a 14.7% jump in the value of the liabilities they face, largely due to lower gilt yields.
The increasing financial pressure that defined benefit pensions are coming under has led to the majority of companies closing their schemes to new members.
There is also a growing trend for the pensions to be closed to existing members as well, with people instead offered less generous defined contribution schemes, under which the individual shoulders the risk of investment volatility and increased life expectancy, or hybrid schemes under which the risk is shared.
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