The current era of low gilt yields could last for decades, leaving pension funds stuck with critical deficits, says the Pension Corporation.

The pension insurance group reckons that a new round of quantitative easing this week could soon add another £85 billion to UK pension deficits by lowering gilt yields by another 30 basis points. Another drop in equity markets (by 10%) after a possible Greek default in March is also factored into this gloomy outlook.

Mark Gull, the Pension Corporation's co-head of asset management, used historical parallels to suggest that depressed gilt rates, which directly lead to higher projected liabilities for pension schemes, could stay around for "decades rather than years".

US 10-year government bond yields dipped below 3% in 1933 during the great depression and did not go any higher than that for another 23 years. Similarly, Japanese government bond yields have not been able to break significantly above the 2% yield mark since dropping beneath it in 1997.

Gull said a prolonged era of low gilt yields, while good for taxpayers will continue to make life harder for pension funds. He said this makes quantitative easing a "form of wealth transfer" from savers to borrowers who are desperate to reduce their debts.

Gull's colleague David Collinson, co-head of business origination, said that the short-term impact of quantitative easing and a Greek default could be "devastating" for pension funds.

40% of UK pension funds are due to have their next valuation in March 2012, an assessment that they make once every three years.

Collinson reckons that "there will unfortunately be many tough conversations about funding plans following March's triennial valuation" with many sponsoring companies likely to be reluctant or unable to plug record pension deficits.

Collinson's outlook is equally gloomy on the ability of equity investing to close pension funds' record deficit levels. The UK's overall pension deficit is calculated by the Pension Protection Fund to be a combined £255.2 billion at the end of 2011.

The Pension Corporation hopes many pension funds try to reduce the risk posed by their poor funding outlook by completing an insurance 'buy-in' with them – a deal which swaps a chunk of pension fund's usually extensive gilt holdings for an insurance contract covering the fund's liabilities.

Collinson predicts £5bn to £10bn worth of pension buy-ins and buyouts (a more comprehensive insurance option) to be made this year, saying that just 3% of all UK pension fund liabilities are covered by insurance.

dbillingham@wilmington.co.uk