Market Crash Drives up U.K. Pension Shortfalls

October 14, 2008 ( - New Deloitte data shows the worldwide market turmoil has driven FTSE 100 pension deficits to more than £100 billion ($176 billion) if plans calculate liabilities using appropriate interest rates.

According to a Reuters news report, Deloitte is advising U.K. pension fund clients to base calculations of future pension payments on corporate bond yields only of non-financial institutions to reflect their true value. Non-financial yields are now considerably lower than yields on financials.

Pension plans have to rely on a discount rate generally based on AA-rated corporate bond yields when figuring out their liabilities. A higher yield results in lower liabilities and consequently lower deficits. “From an audit perspective, using yields on financial bonds (to calculate liabilities) lacks credibility,” David Robbins, consulting partner at Deloitte told Reuters.

The other major factor contributing to rising deficits is tumbling financial markets, which have knocked about 20% off the value of pension assets, Deloitte said. "U.K. pension schemes are addicted to equities, with around 60% of their assets in equities, and that is too high," Robbins said, according to Reuters.

Meanwhile, Watson Wyatt has estimated that FTSE 100 companies had a surplus of £12 billion ($21.1 billion) at the end of September, taking into account what it called "significantly higher AA-rated corporate bond yields that have made liabilities appear smaller," Reuters reported.