British company pension deficits soar past 230 billion pounds - report

LONDON Wed Nov 7, 2012 6:45pm GMT

1 of 2. An elderly man rubs his face as he sits in the spring sunshine in St James's Park in London March 8, 2012.

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LONDON (Reuters) - The total deficit of British final-salary linked company pension schemes more than doubled to 231 billion pounds in the space of a year, a report said on Wednesday, highlighting the impact of rock-bottom bond yields.

The Pension Protection Fund (PPF) calculated that the aggregate deficit of 6,316 so-called defined benefit schemes - representing about 12 million members - had shot up from 78.3 billion in March 2011.

"Things have got much worse for defined benefit (DB) final salary pensions," said Mel Duffield, head of research at the National Association of Pension Funds (NAPF).

"Our fear is that the firms might decide to close these pensions altogether, further undermining the UK's ability to save for its old age," Duffield said.

Benefits under these DB schemes are pre-determined using a formula based on salary and duration of employment.

Repeated rounds of central bank easing have contributed to a sharp drop in the yield on British government gilts - a staple investment for pension funds - making it more expensive for funds to match income to liabilities unless they add riskier, higher-yielding assets to portfolios.

"Pension funds urgently need help to deal with this difficult environment. The Government should encourage the Pensions Regulator to allow them to make a temporary uplift to discount rates based on gilt yields," said Duffield.

Funding levels of pension schemes are determined by a variety of factors, including economic growth, equity market returns and yields on UK gilts. Pension funds are willing the markets to improve to alleviate pressures on their deficits.

But gilt yields fell below 2 percent, pushing the funding ratio in DB pension schemes - their assets divided by their liabilities - down to 77 percent since March, despite a small pickup in equity market, the report said.

In April, the Pensions Regulator, which oversees the funding commitments of pension funds, rejected calls to make allowances for UK pension funds to help alleviate the impact on their coffers from repeated rounds of quantitative easing from the Bank of England.

(Editing by David Holmes)

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