Consultants have raised questions about pension liability calculations, after bond market jitters drove liabilities to historic highs...
Aon Hewitt found low gilt yields had sent the collective final salary pensions accounting deficit of the FTSE350 rocketing upwards by 13.2% over the past month - up from £53bn to £60bn - while the collective buyout deficit rose from £400bn to £435bn.
The consultant said this was the highest ever value placed on pension scheme liabilities, while the 30% increase since the start of the year is the biggest jump for 15 years.
JLT Pension Capital Strategies estimated that the FTSE350 deficit reached £55bn this month, with FTSE100 at £45bn and all UK private sector schemes at £127bn.
But compared to 2010, the collective deficit for FTSE350 companies has actually shrunk by £2bn, although the FTSE 100 deficit grew by £2bn and private sector schemes added £9bn to their overall deficit.
JLT PCS managing director Charles Cowling (pictured) said funding deficits were increasingly due to pension liabilities being linked to gilts rather than corporate bonds.
He commented: "Strange times, strange markets; low corporate bond yields and even lower government bond yields; yet the pension scheme deficits are similar to last year.
"The impact of weak markets has been offset by lower long-term inflationary expectations, further deficit-recovery contributions and schemes holding more bonds.
"However, funding deficits are increasing significantly due to trustees linking their pension liability calculations to government bonds rather than high-quality corporate bonds (which is the basis used for accounting liabilities).
"This calls into question whether the accounting position should be considered 'realistic'."
Aon Hewitt managing principal Kevin Wesbroom said low yields meant investments are guaranteed to fail to keep index-linked liabilities in check.
He said: "The cost of pension scheme liabilities has rocketed by 30% since the start of the year.
"This is the largest increase in liabilities for almost 15 years and leaves the cost of pensions at the highest level we have ever seen.
"The reason for this is that yields are now the lowest we have experienced in recent history, in fact yields on index-linked bonds, net of inflation, are now negative.
"That means that these investments are guaranteed to fail to keep pace with index-linked liabilities."
Source: Professional Pensions