UK pensions deficit

It seemed too good to be true. When the Pension Protection Fund announced in March that collectively, its member schemes had a surplus of £0.3 billion, UK savers heaved a sigh of relief and hoped that the trend would continue.

However, the PPF have confirmed that the schemes have fallen back into deficit again. At the end of April, UK defined benefit schemes had a total deficit of £2.2 billion. The deficit may be partially explained due to the dip in the equity markets and fear about UK political uncertainty and more severely about the European debt crisis took hold. Commentators expect a better performance now that the European Central Bank and the European finance ministers have outlined their commitments to this problem. But a month is a long time in economics so who knows what May’s figures will bring for pensions?

Not all of the 7,400 UK private sector final salary schemes were in deficit in April – the PPF revealed that 31% of schemes are either on target or have a surplus.

When comparing the figures to last month’s investors may be dismayed. On the other hand, if you consider that this time last year the schemes’ collective deficit was £188.5 billion, there is much to be positive about.

Some of the difference in the 2009 and 2010 figures can be explained by a change in the way in which the figures have been calculated. The accounting practice was altered in October 2009 to adjust the way that final salary pension schemes’ liabilities are worked out. Rather than an accountant’s trick to make the books look better, this adjustment is said to give a truer reflection of the long term nature of pension liabilities.

Nine out of ten defined benefit schemes are closed to new members, and more seem to be closing every day. Whilst their deficits may be frightening, this funding gap must surely pale into insignificance compared to the fact that the state pension is completely unfunded, being set up on a “pay as you go” basis. Interestingly, the UK government does not splash their figures across the news on a monthly basis – it would just be too terrifying.