September 9, 2014 / 9:02 AM / in 3 years

UK pension deficit doubles in year to August

LONDON (Reuters) - A funding shortfall in Britain's private sector defined benefit pension schemes has more than doubled over the past year to reach 170.6 billion pounds (274.92 billion US dollar) at the end of August, the Pension Protection Fund (PPF) said on Tuesday.

The funding gap at the same point last year was 80.3 billion pounds, according to the PPF, created in 2005 to take over the assets and liabilities of UK-based defined benefit pension schemes if an employer goes bust.

The shortfall at the end of August was also up sharply from 122.7 billion pounds at the end of July.

Private sector pension plans have faced a shortfall for more than three years now, the data showed, with three quarters of the 6,150 schemes tracked by PPF in deficit, the watchdog said.

In August, total assets of the schemes rose by 2.9 percent to 1.2 trillion pounds. Liabilities rose faster at 6.3 percent to 1.38 trillion pounds over the same period.

This is mainly due to falling gilt or British government bond yields which have been at low levels partly due to action taken by central banks since the financial crisis to spur economic growth.

The UK's 15-year benchmark gilt yields fell by about 35 basis points during August after Bank of England Governor Mark Carney cooled financial market expectations that UK interest rates would rise sooner than predicted.

The Bank of England has pointed to a pick up in wage growth as a major factor for the timing of an interest rate move.

Carney said on Tuesday the Bank of England might start to raise interest rates next spring although the labour market was still in the process of recovering from the financial crisis.

Britain is still expected by financial markets to be among the first developed economies to raise interest rates, which should help to close the pension funding gap as pension schemes make more money from their investments.

Pension industry consultants said in the meantime the funding shortfall was manageable.

"The increasing levels of deficit cause a degree of discomfort but I don't suppose anybody is going to be hitting the panic button," Tom McPhail, head of pensions research at Hargreaves Lansdown, said.

Jon Hatchett, head of corporate consulting at Hymans Robertson, said that for most major companies pensions continued to remain affordable. But he said the funding gap highlighted yet again the benefits of hedging yield risk.

(1 US dollar = 0.6205 British pound)

Editing by Simon Jessop and Jane Merriman

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