Private pension funds in the UK are reported to be struggling with far larger deficit levels than other countries, according to analysts. This article looks at the nature of the UK pension fund slump and examines how it has hit the UK far more than other countries.

A pension fund is measured by its assets and its liabilities. Much of a typical pension fund’s assets is held in equities, so recent gains from the bullish stock market have helped lessen the size of their pension fund deficits in many countries. Many stock markets around the world have been rallying since early 2009 and this has boosted the value of pension funds.

Liabilities for a pension fund are measured by amount of money that they will have to pay out in the future to people when they retire. This liability figure is measured using both bond yields and inflation.

In the UK, we have seen the Bank of England cut interest rates successively to provide a stimulus to the struggling economy. As interest rates reached zero, there was little room for further manoeuvre, so the Bank followed a policy of quantitative easing instead.

The Bank’s goal is to meet the inflation target of two percent and quantitative easing is successfully helping the economy towards this goal. Quantitative easing means that more money is put into the economy by the Bank of England. They do this by buying up Government and corporate bonds. This quantitative easing process helps to encourage spending and provides a further boost to the economy. An indirect effect of quantitative easing, however, is that this action reduces the yields on gilts and other bonds. This reduced yield pushes up future pension liabilities.

The Organisation for Economic Co-operation and Development (OECD) announced research recently that shows that final salary scheme pension funds around the world reduced their deficits from 24% in December 2008 to 18% in June 2009. The UK final salary pension scheme deficit however rose from 9% to 13% over that same time period.

To add to this alarm is further research that suggests UK private pension deficits are grossly understated. Independent equity research provider AlphaValue suggests that Lloyds, RBS and BA are carrying gross underestimations. They put the Lloyds shortfall at €14.2bn, RBS at €13.3bn and BA at €10.5bn. They note that UK companies are amongst the worst offenders for underestimating their pension deficits.

The UK stands alone in its growing deficit. Coupled with the reported increase in UK pension deficits, this underestimation makes for grim reading.

Personal Finance
pension, pension fund, retirement, uk