Deficits at U.K. corporate defined benefit plans increased 29.3% over the year ended Nov. 30, to £212 billion ($332.3 billion), as persistently low interest rates continued to increase liabilities.
JLT Employee Benefits' monthly index, which shows the funding position of all U.K. private-sector DB plans, showed funding levels also decreased, to 85% as of Nov. 30, compared with 87% a year previous. FTSE 100 company pension fund deficits increased 10.8% over the year to £72 billion, while FTSE 350 company deficits increased 16.9% to £83 billion.
Liabilities for all corporate DB funds in the U.K. increased 11.6% to £1.446 trillion, and assets increased 9% to £1.234 trillion.
“It is very simple — it is low interest rates that have (gotten) even lower in the last 12 months” causing the leap in deficits, said Charles Cowling, director at JLT Employee Benefits, in a telephone interview. “You are seeing AA bond yields at well under 4%, which is astonishing. Gilt yields are well under 3%, and we have negative real yields. There is nowhere in the bond market to invest money to get the sorts of returns needed to get us out of these holes in the pensions.”
“There is a fairly decent increase in assets — it is just that liabilities have gone up by even more,” Mr. Cowling added.
However, Mr. Cowling said the upcoming changes to the U.K.'s defined contribution market could offer relief. Referring to the change that means participants will no longer be required to purchase an annuity, starting in April, Mr. Cowling said: “(That) means that DC is a very attractive option. It may be, and we are already seeing evidence of this, that a lot of individuals will want to transfer their DB schemes into DC schemes, because of the extra attractions. That would start to shrink the size of DB schemes.” He said the effects, however, will remain unknown until after the changes. “If (transfers) are substantial, then DB schemes could shrink, and that would start to take the pressure off companies.”