The combined deficit of UK defined benefit pension schemes increased by £2.1 billion in October, from £166.1 billion to £168.2 billion.
Over the past 12 months aggregate DB deficits have surged by £93.9 billion, in part because the yield on UK Government gilts – which schemes use to match liabilities – has remained persistently low.
Figures do not take into account the Bank of England’s 5th November decision to pump £150 billion more into the UK economy via quantitative easing (QE).
Tom Selby, senior analyst at AJ Bell, comments: “Defined benefit pension deficits remained eye-wateringly high at £168.2 billion in October, while the number of schemes facing up to a deficit has risen 10% over the past 12 months to 3,216.
“The main driver behind surging DB deficits over the past year – and indeed the previous decade or so – has been persistently low UK Government gilt yields.
“Because a pension scheme’s liabilities are calculated based on the returns available from gilts, a lower yield leads to higher deficits. In this context the Bank of England’s announcement of £150 billion more QE – deemed necessary to prop up the UK’s ailing economy during lockdown – could be like throwing kindling on an already roaring pensions fire.
“The Bank’s decision to buy more UK gilts should push up the price of gilts and in turn suppress the yield, driving up liabilities and heaping further pain on employers already shouldering the burden of enormous historic DB pension promises as well as dealing with the fallout from the Coronavirus pandemic.
“On the other side of the coin, of course, if the Bank’s intervention helps keep those companies afloat then in the long-run it may well actually preserve the pensions entitlements of millions of workers.
“Yesterday’s positive vaccine news could also help, with the 10-year UK gilt yield jumping from 0.25% to 0.4% in anticipation of a brighter outlook for the economy if (and hopefully when) it is rolled out to the population.”