Research shows that during August pension deficits have grown by £100bn

This week PwC released the latest figures from their Skyval Index which saw UK defined benefit scheme deficits increase by £100bn, bringing the total deficit to £710bn.

Pension deficits have risen drastically since the EU referendum, this due to the quantitative easing programme designed by the Bank of England to save against an economic slowdown faltered.

The Bank made plans to buy a certain amount of bonds, which it then failed to do, the expectancy that the Bank would buy the bonds helped push up their price.

This in turn pushed down on the yield and for some three and four year bonds the price rose so much that the yield turned negative.

The Bank had announced it would make up the £52m shortfall from Tuesday in future buybacks, which also helped push up the price of gilts.

Actuaries use the interest rate on gilts, otherwise known as the yield, as the main tool in estimating how much they will have to pay out in pensions in the future. A fall in the rate means a company needs more now than it had previously calculated.

Raj Mody, partner and PwC's global head of pensions, said:

"With the prospect of further action from the Bank of England to reassure the economy in these uncertain times, the challenging environment for pension funds is likely to endure for several years. PwC's recent pensions risk survey showed that half of funds had not protected themselves against falls in long-term interest rates.

"Companies and pension fund trustees should revisit their approach to the risk profile of their pension fund. They should also ask themselves if gilt yield measurements are still relevant for them when deciding how to measure and finance the deficit. There may be more appropriate measures that are better tailored to their own fund's strategy. This will give a more realistic view for trustees and sponsors helping them to make more effective decisions."

Published 09.09.2016

ceri.pugh@wilmingtonplc.com