The funding shortfall faced by UK pension schemes dived by two-thirds last month on the back of a strong stock market performance, figures showed yesterday.
The UK’s nearly 7,400 defined-benefit pensions, which include final-salary schemes, collectively had a deficit of £15.1billion at the end of February, down from £51.9billion in January, according to the Pension Protection Fund (PPF). The improvement was driven by a 2.5% jump in the value of assets held by pensions during the month as a result of rising UK and global equity markets.
At the same time, a rise in gilt yields led to a 2% fall in the value of liabilities the schemes faced.
This combination of factors helped more than 300 pension schemes to claw their way out of the red during the month, although 70.5% still face a funding shortfall.
The funding position of pension schemes has improved vastly since February 2009, when the deficit stood at £204.7billion.
Rising equity markets have helped to boost the value of scheme assets by 20.4% during the past 12 months, while changes to gilt yields have reduced their liabilities by 2.2%.
More significantly, a change to the actuarial assumptions used when calculating pension schemes’ future costs knocked about £70billion off their funding shortfall when it was first introduced in October last year. The improvement in the funding position of defined-benefit schemes is unlikely to halt the current trend for employers to close them to new members.
Many companies are also closing the schemes to existing ones as well, as rising life expectancy and investment volatility have made them increasingly expensive to offer.
They are replacing them with less generous defined-contribution schemes, under which the individual, rather than the company, shoulders all of the risk.
Last week, figures from Aon Consulting suggested the funding shortfall faced by the UK’s 200 biggest defined-benefit pension schemes had stabilised last month, at £94billion, compared with £97billion in January.