Pension scheme deficits rise £15bn during October to £77bn

A sustained period of asset growth and increased confidence in meeting inflation targets are required to clear pension deficits

Expected future increases in the UK’s inflation rate have massively increased the deficit of the 200 largest privately sponsored defined benefit (DB) pension schemes during October, according to Aon Consulting, the leading employee risk and benefits management firm.  To a lesser extent, a small dip in asset values also contributed to the deficit ballooning by £15 billion to £77 billion, all but wiping out the £16 billion gains made in September.

Expecations of future inflation levels are a key cause of pension scheme funding volatility. Although there have been positive economic signals recently, expectations of higher inflation returned  in October after a period of relative stability, causing the large rise in the pensions accounting deficit.

Sarah Abraham, consultant and actuary at Aon Consulting, comments: “Currently many investors believe that the Government will be unable to to deliver its annual inflation target of 2%. This increases pension scheme deficits because most pension schemes promise to pay benefits that are linked to inflation.

“The position is very volatile because if this lack of confidence in achieveing inflation targets worsens, then pension schemes can expect deficits to increase even further. On the other hand, if the market had confidence that inflation will remain under 2%, pension scheme deficits would decrease by a massive £60 billion.

Any sign that high levels of inflation can be avoided will greatly help pension scheme finances.

“Managing inflation expectations, however, is not the only path to improving pension scheme finances.  For example, if other factors like mortality, interest rates and wage bills remain the same, then annual asset rises of 8% would be enough to remove pension scheme deficits within 7 years.”

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