The Pension Protection Fund has estimated [1] that aggregate deficits in PPF-eligible schemes were a record £367.5 billion at the end of January 2015, up £101.2 billion in the space of a month. At the end of January 2014, deficits were estimated at just £46.4 billion.

These numbers compare the value of pension scheme assets with an estimate of how much it would cost to pay insurance companies to secure the compensation payments that members would receive if their schemes fell into the PPF.

Commenting, Mark Duke, a senior consultant at Towers Watson, said: "Companies have been paying tens of billions of pounds into their pension schemes each year, but that has not been enough to stop deficits from getting bigger in an environment where lower interest rates have increased pension liabilities.

"Employers who find the volatility of pension costs exasperating may hope that members approaching retirement will take this problem off their hands by giving up their retirement incomes in exchange for pension pots that they can access as they like.  This won't always reduce the deficits that companies must pay off but anything that shrinks the size of the scheme means that more of the costs are finally nailed down. Pension freedoms will certainly make some members determined to transfer out of final salary pensions but that doesn't mean there will be an exodus – most people value what they have and advice costs will deter many from exploring their options unless employers pay.

Piggy Bank © The Economic Voice"When employers sit down with pension scheme trustees to revise their funding plans, most will ask for more time to eliminate the shortfalls. However, the numbers that schemes look at when monitoring how badly their funding plans have been blown off course are not as scary as the PPF's.  Expectations of what inflation will be in future have come down, which allows schemes to budget for awarding smaller increases – this this is not fully captured by the PPF because many of its compensation payments don't rise with inflation. Bond yields have also increased since the end of January, so a snapshot taken today would not look as bad.

"The PPF is deliberately raising more in levies than it would need in most scenarios, but it is still at the mercy of events. It would struggle to pay compensation in full if a significant proportion of the deficits it has measured today fell into its hands following employers' insolvency. It will hope that, although it is on the hook for more money if employers do go bust, economic recovery means the risk of that happening is now more remote."

[1] www.pensionprotectionfund.org.uk/Pages/PPF7800.aspx

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