The combined deficit of UK defined benefit (DB) schemes has hit £1trillion, according to pensions consultant Hymans Robertson.

The company uses its 3DAnalytics, which provides real-time updates to the funding positions of Defined Benefit pension schemes, to assess deficit levels.

Hitting the £1trillion mark is due to further falls in gilt yields as the government's quantitative easing programme comes up against unexpected challenges, such as pension schemes holding onto longer-
dated government bonds.

The recent reduction of the base rate of interest by The Bank of England increased demand for gilts, making it less likely that investors will sell to the central bank.

Every time the base rate is reduced, DB deficits are pushed up, putting greater pressure on trustees to hedge risk – and the most impactful way they can do this is through gilt-based investments.

Hymans Robertson partner Patrick Bloomfield, said the sustainability of DB schemes is under the spotlight: "We need to caution those in DB schemes against a rush to the exit, despite the allure of so called "Freedom & Choice."

"Transfer values are at record highs, but once a DB member transfers out, there's no going back and finding a better deal elsewhere might not be possible for the majority, without taking on more personal risk" he said.

Bloomfield emphasised the importance of strong business support for schemes to weather the current storm.

He said: "Only members in schemes with less robust sponsoring businesses need to be worried, but in the current climate it's unlikely we'll see a sudden rush of more schemes falling into the PPF."

"We need to remember that corporate failures in the UK continue to be low, with underperforming businesses propped up by low interest rates and cheap borrowing."

First published 18.08.2016

Lindsay.sharman@wilmingtonplc.com