That’s a sizeable hole in the overall pension bucket.
The Fund, set up in 2005 to protect the savings accrued by private sector workers, has seen the pensions in its 'universe' hampered by weak economic growth and central bank monetary easing measures (funding levels are determined by growth, equity market returns and yields on UK gilts, among other factors). As a result, the total funding ratio (the ratio of assets compared to liabilities) of these pensions now stands at 76.8%, down from 82.6%. This is dangerous territory, as a ratio below 100% indicates that it is either unable to make payments or is in danger of not being able to do so.
The recession and the trauma in the eurozone are the chief culprits. Back in May 2011, the gap between assets and liabilities put the pensions schemes of firms covered by the PPF just £24.5bn in the red. But in just a single year, there has been a 12-fold increase. And the lionshare of these liabilities appeared suddenly in May (in April, the deficit increased by just £10bn, a fraction of the latest debt figure). This sudden downturn has left private firms struggling to make up the shortfall. A total of 5,503 schemes are in deficit. Just 929 schemes are left in surplus.
Joanne Segars, chief executive of the National Association of Pension Funds, says: ‘This is a big leap further into the red for private sector final salary pension funds, and it reflects the immense pressure they are under. Cash-strapped businesses that are already struggling to keep these pensions going will have to find more assets to fill in the deficits.’
And the economy won’t offer any respite any time soon. The £325bn in quantitative easing continues to take its toll, creating £270bn worth of liabilities in the pensions sector by driving down yields on gilts. Over the last month, 15-year gilt yields have fallen by 0.55 percentage points, which resulted in an increase in liabilities of 7.6%. Ouch.
‘This is a volatile monthly index,’ says Segars. ‘Quantitative easing and international investors seeking a safe harbour from the Euro storm have contributed to a sharp drop in gilt yields. That gilt fall has fuelled this record deficit, which is more a reflection of accounting rules on pensions rather than any structural weakness.’
I.e. It’s your fault, guv…