The deficit for UK defined benefit (DB) pension funds fell by £20 billion in September 2016, according to research by PricewaterhouseCoopers (PWC).
Its Skyval index, which is based on the Skyval platform used by individual pension funds, found that the funding deficit was £690 billion in September 2016, compared to a record high of £710 billion in August 2016.
The accounting deficit for DB pensions remained static at £490 billion in September 2016.
Raj Mody (pictured), partner and global head of pensions at PWC, said: “September’s market movements go to show that, layered on top of the long-term challenges that pension funds face, some will also have to deal with the impact of short-term volatility. This can particularly affect funds with larger short-term benefit payments to meet, depending on whether their asset portfolio is properly set up to meet those demands without having to make emergency changes to release cash.
“Although the deficit situation arises from the state of long-term interest rates, pension fund trustees and [employer] sponsors may question why current long-term interest rates matter. After all, pension liabilities depend on inflation and life expectancy, and pension benefits are not calculated with reference to interest rates.
“However, given that [employer] sponsors are under pressure to finance pension funds over a much shorter period than the whole lifetime of the pension fund, then this means there has to be a way to measure the deficit as it stands in current terms. If long-term returns are forecast to be lower, this can increase the cash demands on [employer] sponsors, to make good the difference in the short term.”
