LONDON (Reuters) - The shortfall in Britain's private sector pension plans hit its lowest since June 2011 last month, potentially freeing up cash for firms to increase investments which the Bank of England says are the key to a sustainable economic recovery.
The aggregate deficit for 6,150 final salary pension schemes dropped to an estimated 27.6 billion pounds ($45.2 billion) in December from 59.7 billion pounds in November, according to data from the Pension Protection Fund, a watchdog.
A rise in bond yields and share prices strengthened the funding position of pension schemes, a PPF spokesman said.
The deficit was as large as 221.2 billion pounds in December 2012.
The PPF was created in 2005 to take over the assets and liabilities of UK-based defined benefit pension schemes if an employer goes bust.
Michael Saunders, economist at Citi, said the narrower shortfall paved the way for lower contributions in future.
"Rising pension contributions have been negative for investment. The drop in deficit feeds through into lower contributions and that should help business investment," Saunders said.
BoE Governor Mark Carney has said a pickup in business investment is crucial if Britain's unexpectedly strong economic recovery of last year is to get on to a firmer footing.
Yields on 10-year UK gilts rose more than 100 basis points in 2013 while the UK stock market rose more than 14 percent.
Reporting by Ana Nicolaci da Costa; Editing by John Stonestreet