The coverage ratio of UK defined benefit (DB) schemes worsened somewhat in January, decreasing to 94% from 96% in December of 2009 as turbulent markets hit the value of schemes’ assets. The FTSE ALL Share Index fell, resulting in a 1.8% drop in assets across the sample universe of DB schemes. In addition, lower gilt yields led to a 0.1% increase in liabilities, Pension Protection Fund (PPF) figures show.

The outlook for company pensions, however, could improve if yields rise following the Bank of England’s decision to pause quantitative easing. The central bank has spent about £200bn to buy government gilts, which has contributed to increased pension liabilities by forcing yields lower.  The policy is at a crossroads after being introduced a year ago to ease liquidity conditions in the UK economy. The National Association of Pension Funds (NAPF) has been particularly vocal about the impact of quantitative easing on corporate pension scheme liabilities and deficits.

Total assets less liabilities

source: ppf

UK’s nearly 7,400 DB schemes had a total deficit of £51.9bn at the end of January compared to £32.6bn a month earlier, according to the PPF. The combination of lower assets and an increase in liabilities left three out of four schemes in the red at the end of January. The deficit is still only a fraction of the £183bn.6bn shortfall in January 2009.

The number of schemes in deficit stood at 5,528 in January compared to 5,364 in the previous month. The deficit picture was considerably worse a year ago with 6,433 schemes in deficit in December 2009. In addition to the market rally, a new actuarial assumption introduced by the Pension Protection Fund (PPF) in October 2009 has helped reduce the total liabilities of the sample universe by €74.8bn. The actuarial change helped lift the coverage ratio to 89.6% last October. The ratio would have been 83% without the change.

Estimated number of schemes in deficit

source: ppf

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