UK defined benefit pension funds could see their deficits increase by £85bn due to the significant risks they face in the first few months of 2012, according to Pension Insurance Corporation.
In its latest Pension Risk Transfer Index, published today, the risk management company said further quantitative easing, a potential Greek default in March and a possible spike in the oil price due to tensions in the Gulf could all drive up pension fund deficits.
If gilt yields drop by 30 basis points as a result of more quantitative easing, the equity markets drop by 10% as a result of the eurozone crisis and inflation remains just below 5% because of increased oil prices then the increase in deficits could be £85bn, it said.
Depending on the timing, these factors could hit the 40% or so of pension funds with triennial valuations - and their sponsors - particularly hard.
David Collinson, co-head of business origination at Pension Insurance Corporation, said: 'Individually, the possible impact on funding positions of QE, tension in the Middle East and a Greek default might be expected to be significant. Combined, they could prove devastating.
'As we saw during last summer, violent shocks to funding positions can appear pretty much out of the blue and it is essential that trustees manage risk as effectively as possible. There will unfortunately be many tough conversations about funding plans, following March's triennial valuations.'
Last year saw the very low level of interest rates available on risk-free assets almost singlehandedly 'destroy' the funding positions of un-hedged schemes.
But pension funds holding gilts saw the value of this class of investment increase 'significantly' during 2011. According to Pension Insurance Corporation, when measured against gilts, the cost of insuring pensioner liabilities actually remained relatively static.
'This means that de-risking by way of a pensioner buy-in remains a realistic option for pension funds, without any need for additional financial support from their sponsor', it said.
As a result, the company said this kind of transaction - where gilts are generally exchanged for insurance against a specific tranche of pensioners - could potentially underpin the pension insurance market this year.