UK’s pension lifeboat gets lower in the water as deficits soar in December

Pension shortfalls grew at a rate of nearly £1bn a day during December, figures released by the UK's pension lifeboat have revealed.

The Pension Protection Fund (PPF), into which defined benefit pension schemes fall upon corporate insolvency, calculated an aggregate deficit for the 5,794 schemes covered of £224bn at the end of December.

The shortfall grew from £195bn at the end of November.

Swinging the axe

The issue of spiralling pension scheme commitments was brought sharply into focus last week as Royal Mail, which has one of the country's largest schemes, said it would need to shut its scheme next year, or else face over £1bn of annual costs to keep it afloat.

Pension scheme valuations are the net of the value of assets held and estimations of future liabilities to be paid to scheme members.

Asset values are linked to the movement in stock markets and liabilities are calculated by way of bond yields – falling yields reduce the discount factor applied and increase the valuation of the liabilities.

Andy Tunningley, the head of UK strategic clients at Blackrock, concluded the latest set of data from the PPF was "a familiar story".

He added: "Positive performance in equity markets was not enough to offset rising liability values given falling yields, and so overall funding levels worsened."

December: Better or worse?

The increase in the PPF deficit during December is at odds with a slew of data released earlier this month.

According to actuarial consultants at Mercer, the value of shortfalls of the FTSE 350 fell by £10bn during December. However, deficits had increased threefold during 2016 and concerns from experts remain that bulging shortfalls could have a restraining impact on companies' financial performance.

The difference comes from a combination of the calculation method used and the fact that liabilities are capped if schemes fall into the PPF.