The aggregate deficit of defined benefit pension schemes in the Pension Protection Fund (PPF) 7800 Index reached £383.6 billion at the end of June 2016, an £89 billion increase from the £294.6 billion recorded at the end of May 2016, according to data from the PPF.
The latest PPF 7800 Index update, which looks at 5,945 schemes, also found that 4,995 schemes are in deficit and 950 schemes are in surplus.
At the end of June 2016, total assets were £1,363.4 billion and total liabilities were £1,747 billion. The funding ratio dropped from 81.5% at the end of May 2016 to 78% at the end of June.
The index provides the latest estimated funding position for defined benefit (DB) pension schemes that are potentially eligible for entry into the PPF, on a section 179 basis.
A scheme’s section 179 liabilities represent the premium that would have to be paid to an insurance organisation to take on the payment of PPF levels of compensation, which may be lower than the full scheme benefits.
Tom McPhail, head of retirement policy at Hargreaves Lansdown, said: “The UK’s gold plated pension system is starting to look tarnished. Deficits are soaring, employers are reneging on their promises and still more money is needed. [Organisations] are having to divert profits into schemes to make good on their promises, which means less investment capital to help businesses grow and less money available to invest in the pensions of younger workers.
“Accrued pension rights have to be respected and investors have to be able to trust the system, however there is also a growing argument for the government to look at finding a more balanced approach to the retirement funding needs of [the] UK workforce.”
Graham McLean, head of pension scheme funding at Willis Towers Watson, added: “The deficits that employers need to pay off are measured differently; they don’t assume that benefits will be cut back to PPF levels, but they typically use less cautious assumptions.
“On any measure, though, the market reaction to Brexit has kicked another big hole in pension schemes’ funding levels. Assets have grown, at least when measured in sterling, but not quickly enough to keep pace with the increased cost of paying promised benefits in a world where interest rates and expected returns on assets are lower.
“Some trustees will also fear that employers are now less well placed to step in to support their schemes if things go wrong. If this leaves them less prepared to take risks with their schemes’ investments, plans to repair deficits will rely more heavily on employers getting the cheque books out.”