UK - The funding position of UK defined benefit schemes deteriorated in May, with the aggregate deficit increasing to £41.5bn (€50.1bn) at the end of the month, according to figures from the Pension Protection Fund (PPF).

Findings from the monthly PPF 7800 index showed the total deficit of schemes in deficit increased from £74.4bn to £98.4bn, while the aggregate surplus of all the schemes in surplus slipped from £72.3bn to £57bn in May.

As a result, the aggregate funding position of the sample of 7,342 schemes moved from £2.2bn at the end of April to £41.5bn a month later.

The number of schemes in deficit increased from 5,066 to 5,450, while just 1,892 reported a surplus.

The PPF noted the decrease in scheme assets, which fell by 1.9% to £895.8bn, could be attributed to falling UK and global equities, while the change in gilt yields resulted in a 2.1% increase in pension liabilities.

Recent figures from Towers Watson suggest UK company deficits shrunk by £7bn in May as the future rates of inflation anticipated by the markets were lower at the end of the month than they were at the start, reducing the expected cost of inflation-linked pension payments.

The consultancy admitted the 6.1% drop in UK equities in May had contributed to an estimated £11bn fall in FTSE 350 companies' pension fund assets during the month. 

However, by the end of the month, markets were expecting average inflation of 3.5% over 20 years, down from 3.7% at the end of April, which helped reduce pension liabilities by £18bn.

Overall, Towers Watson estimated the combined pension deficits of FTSE 350 companies have fallen from £77bn to £70bn since the end of April.
John Ball, head of defined benefit consulting at Towers Watson, said: "This might seem a perverse result, but it arises because it isn't only stock markets that are volatile.

"An unprecedented combination of economic conditions makes it harder to predict what will happen to inflation over the coming years, and when inflation expectations jump around, so do pension deficits."

Meanwhile, Aon Consulting's Aon200 Index, which tracks the aggregate deficit of the 200 largest privately sponsored pension schemes, claimed the aggregate deficit of the pension scheme sample was reduced by £13.5bn in May.

Aon claimed the fall in the deficit from £97.2bn in April to £83.5bn a month later was the biggest improvement since June 2009.

It attributed the movement to a reduction in long-term inflation expectations that offset asset losses from investments.

Sarah Abraham, consultant and actuary at Aon Consulting, said: "As cheaper benefit provision is anticipated, liabilities have fallen, and this has gone some way to mitigate the adverse effect of asset falls.

"Scheme managers will be praying the dream scenario of rising assets and falling liabilities is round the corner.

"Until then, deficits look set to remain huge by historical standards."

Elsewhere, Pension Capital Strategies' (PCS) monthly index of the funding position of all UK private-sector DB schemes at the end of May on an IAS19/FRS17 accounting basis reported an aggregate deficit of £185bn, or a funding level of 84%.

It also calculated the deficit in FTSE 100 DB pension schemes had reached £58bn, or a funding level of 87%, while FTSE 350 pension arrangements had a combined deficit of £72bn, or 86% funding level.

Charles Cowling, managing director at PCS, said: "We have seen a big recovery in equity markets in the last year, but liabilities have also risen by a similar amount.

"For all UK private-sector pension schemes, we estimate the total deficit figure now stands at £185bn.

"We are continuing to see companies take big steps to reduce pension risks and liabilities, but 2010 looks like it will not be an easy year for UK pension schemes."