Defined benefit schemes back in the red

Defined benefit pension schemes sunk back into the red during May as the cost of providing future benefits increased.

The UK’s 6,533 defined benefit schemes, including final salary pensions, had a collective funding shortfall of £13.5bn at the end of the month, compared with a surplus of £2.3bn at the end of April, according to pensions safety net the Pension Protection Fund.

The deterioration in schemes’ financial position was caused by an increase in the liabilities they face outstripping a rise in the value of their assets during the month.

The value of pension schemes’ assets crept ahead by just 0.1 per cent in May, as rising returns on bonds and property managed to offset falls in equities seen during the month.

But liabilities jumped by 1.7 per cent, to be 11.5 per cent higher than a year ago, due to lower gilt yields, upon which future pension costs are based.

Pension schemes are also in a worse position than they were in May 2010, when their deficit stood at £4.4bn, although some of the deterioration is due to the introduction of new accounting rules, which increased schemes’ liabilities by 3.6 per cent. Around 66 per cent of defined benefit schemes were in the red at the end of May, with these pensions collectively facing a deficit of £80.8bn.