Market rally good news for pension plans

December's stock market rally helped the UK's defined benefit pension schemes end the year back in the black, figures showed.

The country's 6,560 defined benefit schemes, including final salary pensions, collectively had a 21.7bn surplus at the end of December, according to pensions safety net the Pension Protection Fund.

The funding position was a considerable improvement on the 1bn deficit at the end of November, while it was also up on the 6.6bn surplus in December 2009.

The change was driven by a strong performance from global stock markets during the month, with the FTSE All-Share Index rising by 7 per cent, contributing to a 3.4 per cent rise in the value of pension schemes' assets.

This gain was enough to offset a 1 per cent increase in the liabilities pension schemes face due to a fall in index-linked gilts during the month.

But despite the overall improvement, 60 per cent of defined benefit pension schemes still have a funding shortfall, with a collective deficit of 61bn.

Defined-benefit pensions have become increasingly expensive to offer in recent years in the face of investment volatility and increased life expectancy.

The majority of companies have closed the schemes to new members, with many shutting them to existing ones as well.

They are being replaced with less generous defined contribution schemes, under which the individual shoulders all of the risk of investment volatility and increased life expectancy.