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DB deficit hits £242bn despite changes to data

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UK - Updated scheme valuations have improved the estimated funding position of defined benefit (DB) schemes in the Pension Protection Fund's (PPF) 'eligible universe' by around £15bn (€16.9bn), though the reality is deficits have widened further.

Latest figures from the PPF 7800 Index revealed the aggregate funding position of the schemes has declined as the collective deficit increased from £204.7bn at the end of February to £242bn by the end of March 2009.

These estimates, however, are now based on more up-to-date information, which resulted in "upward revisions to assets and downward revisions to liabilities". Although there has been no change to the section 179 actuarial basis since March 2008, more schemes have now submitted full s179 valuations rather than estimates based on the older minimum funding requirement (MFR).

In addition, the PPF noted the number of schemes supplying data for the index has fallen from 7,744 in 2008 to 7,411, which reflects events such as "scheme mergers, schemes' buying out benefits with an insurance company and schemes transferring into the PPF compensation scheme".

As a result of the switch to the new dataset, earlier monthly figures reported by the PPF Index have been updated to reflect the new information, which means that in February although the aggregate deficit of all the funds was originally £218.7bn with just 716 schemes in surplus, under the new dataset the deficit was £204.7bn with 904 schemes in surplus. (See earlier IPE article: Nine in 10 UK DB schemes are in deficit)

At the end of March, meanwhile, and based on the new information, the total number of schemes in deficit reached 6,637 - around 90% of the sample - while the aggregate deficit of schemes in deficit increased from £218bn (£228.1bn on the old data) to £253.1bn, compared to a total of £81.5bn in March 2008.

The figures also showed the number of schemes in surplus dropped to 774, with a total surplus of £11.1bn - down from £13.3bn the previous month - as although the total scheme assets across all the schemes increased 3.5% to £748.2bn in March, this was still a fall of 5.2% in the first quarter and a drop of 10.4% in the year.

The report also revealed scheme liabilities increased by 6.7% to £990.2bn in March, while over the year liabilities rose by 15.5% as lower bond yields have led to a 10.5% increase in aggregate liabilities  over the past 12 months while weaker equity prices have reduced assets.

David Cule, principal at Punter Southall, said the £40bn deficit increase in March showed that "in current conditions UK companies are required to provide at least £240bn of support for UK pension schemes - more if benefits are expected to be provided in full."

He claimed this is "significantly greater than the quantitative easing package put together and on a par with the level of support being put together for the UK banking system" and warned there could be "several possible consequences to this".

According to Cule, these could mean returns to equity shareholders "remaining subdued" and might mean the PPF is forced to reduce the guaranteed level of benefits if many schemes are pushed into the scheme, while other consequences could be that the government might need to give direct or indirect support to pension scheme or the PPF to help maintain benefit levels.

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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