UK pension deficits soar to record highs

LONDON (Reuters) - The deficits of final salary pension schemes in the UK surged dramatically in May to new record highs as weak economic growth and central bank monetary easing measures leave companies struggling to plug the shortfall, data on Tuesday showed.

The aggregate deficit of the 6,432 defined benefit schemes in the UK increased by 95 billion pounds in May alone, to total 312 billion pounds, the Pension Protection Fund calculates.

This compares with a deficit of 24.5 billion pounds just a year earlier.

"This is a big leap further into the red for private sector final-salary pension funds and it reflects the immense pressure they are under," Joanne Segars, Chief Executive of the National Association of Pension Funds NAPF.L said.

"Cash-strapped businesses that are already struggling to keep these pensions going will have to find more assets to fill in the deficits."

Funding levels of pension schemes are determined by a variety of factors, including economic growth, equity market returns and yields on UK gilts.

The UK economy slid into a double-dip recession earlier this year fuelling predictions that another bout of "quantitative easing" by the central bank to inject more money into the economy could be on the horizon.

The Bank of England's 325 billion pounds of quantitative easing to date could cost Britain's pension industry 270 billion pounds by driving down yields on gilts -- a staple investment also used to calculate liabilities -- making it more expensive to pay for future obligations, the NAPF estimates.

Over the last month 15-year gilt yields have fallen by 0.55 percentage points, which resulted in an increase in liabilities of 7.6 percent, the PPF said.

"Quantitative easing and international investors seeking a safe harbour from the euro storm have contributed to a sharp drop in gilt yields," Segars said.

The scale of the shortfall will likely be crystallised when around one third of the UK's final salary schemes report their triennial valuations this year.

Companies are required to fund any dramatic deficits, which can be an immediate hit on cash flow, diverting money from shareholder dividends, stock buybacks and capital investments.

The Pensions Regulator, which oversees the funding commitments of pension funds, rejected calls to make allowances for the impact on valuations of lower gilt yields due to QE when it made its first annual statement on funding conditions in April, saying that most schemes should be able to meet their pension obligations.

The funding ratio of the schemes, which calculates assets as a percentage of liabilities, also worsened last month to 76.8 percent from 82.6 percent a month earlier.

Although total assets rose to 1,031 billion pounds from 989 billion a year earlier, total liabilities also rose to 1,343 billion pounds from 1,014 billion.

"Pension fund assets are actualy higher than 12 months ago but liabilities have risen disproportionately. This is a volatile monthly index and it is important to remember that pension funds work over a long timeframe that helps absorb the effects of market swings," Segars said.

Set up in 2005 to protect the savings accrued by private sector workers, the PPF takes on the assets and liabilities of pension funds that fall under its jurisdiction and charges a levy to pension schemes potentially eligible for its help.

The NAPF, which represents 1,200 pension schemes in the UK, with 15 million members and assets of around 800 billion pounds, has been calling on both the Bank of England and the Pensions Regulator to address concerns over the side effects of QE.

(Editing by Greg Mahlich)