UK Pension Shortfall Decreases by £20B in 2006

December 28, 2006 ( - New research from Watson Wyatt shows the combined retirement fund shortfall of firms in the FTSE 100 fell to £39.9 billion at the end of 2006, from £60.4 billion at the end of 2005.

According to news reports, Watson Wyatt attributes the deficit reduction mostly to improved stock market performance – the FTSE 100 index has risen by around 11% in value in 2006, while the FTSE-All Share index has gained 14%. Watson Wyatt also attributes the reduction to UK pension scheme sponsors giving a boost to contributions (See UK Companies Make Special Pension Infusions) since the establishment of new funding requirements and the formation of the Pension Protection Fund (PPF).

Stephen Yeo, a senior consultant at Watson Wyatt, said in the news reports the 2006 shortfall decrease represents the first sign of a “sustained fall” and Watson Wyatt expects further deficit reductions in 2007, barring any adverse shocks to the stock market. Yeo also said Watson Wyatt expects FTSE 100 companies to contribute at least £5 billion to schemes in 2007, in part to reduce their PPF levy.

Last week the PPF announced an increase in total levies from £320 million this year to £675 million next year. The PPF, which took over the pension schemes of 98 firms during its first year of operation, reported a £343 million ($650.6 million) shortfall (See UK Pension Protection Fund Could Hike Levies to Cover Deficit ).

The £20 billion decrease is a happy ending to a year that did not start out well. An analysis from Deloitte & Touche found the fall in bond yields caused the deficits of UK pension plans to rise sharply in the first few weeks of 2006 (See Market Still Wreaking Havoc on UK Pension Schemes ). Deloitte & Touche had also reported a total pension shortfall for companies in the FTSE 100 of £75 billion rather than £60.4 billion at the end of 2005 (See UK Pension Schemes Another £10 Billion in the Hole ).

However, by the end of March Deloitte reported the shortfall was down to £60 billion (See UK Pension Shortfalls Improve ), and in June, Aon reported a large decrease in UK pension scheme deficits due to corporate bond yields and gilt yields rising (See UK Pension Deficits Drop 30% in June ).

The funding crisis had led many UK firms to follow a trend in the US of closing pension schemes to new members (See UK Pensions Follow US Trend). A recent report predicted that trend would only worsen as administrative costs of pension schemes rises (See UK Pension Report Makes Grim Prediction for DB Schemes ).