British pensions face $134bn deficit
London, February 7, 2012
British companies with defined benefit pension schemes are likely to face rising pressure to plug deficits that could grow by 85 billion pounds ($134 billion) this year against a backdrop of falling bond yields and prolonged market volatility, a survey on Tuesday showed.
If equity markets drop 10 percent more, UK gilt yields fall another 30 basis points and inflation stays just below 5 percent, UK defined benefit pension funds could see deficits spiral, pension liability insurer Pension Insurance Corporation (PIC) estimates in its latest Pension Risk Tracker Index.
Benefits under these schemes are pre-determined using a formula based on salary and duration of employment.
"The possible impact on funding positions of QE (quantitative easing), tension in the Middle East and a Greek default might be expected to be significant. Combined, they could prove devastating," said David Collinson, Co-Head of Business Origination at PIC.
The Bank of England looks set to plough on with a third round of quantitative easing this week to shore up Britain's economy. This will further depress the yield of UK gilts, a pension fund's staple investment, making it more expensive for funds to match income to liabilities unless they add riskier, higher-yielding assets to portfolios.
Pension funds in the UK slashed their weightings for equities to an average of 55 percent in 2011 from 65 percent, while fixed-income holdings rose to 45 percent from 35 percent calculates PIC, as the euro zone crisis roiled equity markets.
The scale of the shortfall will likely be crystallised when around 40 percent of pension funds in the UK report their triennial valuations at the end of March, an assessment of their financial strength conducted every three years.
"There will unfortunately be many tough conversations about funding plans, following March's triennial valuations," said Collinson.
"Big companies sitting on cash will be asked by pension funds to be paid and there will be a tension there for well-off companies about how quickly they should be expected to pay off deficits." - Reuters