Market Still Wreaking Havoc on UK Pension Schemes

January 23, 2006 ( - The fall in bond yields has caused the deficits of UK pension plans to rise sharply in the first few weeks of 2006.

Business Insurance reports that an analysis by Deloitte & Touche LLP shows that, based on the latest disclosures from the FTSE 100, the combined deficit of the pension plans of the UK’s largest companies has increased by around £35 billion ($61.66 billion) since the end of 2005.   They currently have a deficit of around £110 billion ($193.80 billion), according to the Deloitte & Touche analysis.

Tony Osborn-Baker, a director of the consulting arm of Deloitte in London, said the increase was the direct result of “the ‘double whammy’ that we always feared—a rise in inflation expectations and a fall in bond yields.”

Donald Duval with Aon Consulting said that on January 17 alone, due to the move in real yield (2% 2035 IL Gilt) as it fell from 0.81% to 0.70% at the day’s close, the pension deficit increased by 11%.   According to Duval, “The problem arises because there are so many pension funds trying to buy index-linked stock, and there just isn’t enough stock available to go round.  This problem has been created by the Government, who compelled all company pension funds (but not personal pensions) to guarantee all pension against inflation, but then failed to issue enough index-linked gilts to enable pension funds to invest to match the liabilities which the government had imposed on them.  This imbalance is being made worse by the actions of the Pensions Regulator.   Unless the Government issues a huge amount of index linked stock, this kind of market instability is likely to persist for several years.”

Deloitte & Touche previously reported that the UK pension deficit grew by £10 billion in 2005 (See UK Pension Schemes Another £10 Billion in the Hole).