Private-sector pensions suffer worst year ever

• Total pension deficits increased from £37bn to £212bn in 2009
• Despite FTSE rise, rising company liabilities will hurt schemes

• Katie Allen
• guardian.co.uk,
  
• Friday 1 January 2010 13.42 GMT
• Article history

The sharp increase in pension scheme deficits made last year the worst on record for private-sector companies, according to pensions experts, who predict 2010 will see many more final-salary plans close.

Despite a jump in the FTSE 100 share index and rises in other markets to boost their returns, companies' liabilities in 2009 rose markedly from the year before, largely due to moves in bond yields and the way they are used to calculate liabilities. That left the total deficit £175bn higher, according to the advisers, Pension Capital Strategies.

Morrisons in Canterbury … in a bad year for pensions, the supermarket chain, alongside BP and Barclays, closed their final salary schemes to new members in 2009. Photograph: Gareth Fuller/PA

They believe a particularly tough year could see companies spurred into action in the coming months and 2010 could mark a turning point in the way UK companies manage their huge retirement liabilities.

PCS estimates that as at 31 December 2009, the deficit for all UK private-sector, defined-benefit pension schemes was £212bn compared with just £37bn a year earlier. The bigger gap opened up as equities failed to provide enough returns to keep pace with growth in bond-derived liability values. So total assets rose to £919bn from £809bn, but liabilities soared to £1,131bn from £846bn.

For companies in the FTSE 100 taken on their own, the year-on-year deterioration was even starker as they swung from a pensions surplus of £12bn in 2008 to a deficit of £72bn at the end of 2009.

"2009 has not been a good year for UK pension schemes … the increase of over £170bn in the total deficit, as recorded in companies' accounts, is the worst calendar-year performance on record," said Charles Cowling, PCS managing director.

"Despite strong investment returns in equities and elsewhere, pension deficits have risen sharply as liabilities have increased by even more than the investments. This is mainly due to changes in the bond rates used to value liabilities.

"As financial markets have returned to some sort of calm after the turbulence of 2008, , reductions in AA bond yields – used to value pension liabilities – and increased inflation expectations have resulted in significant increases to pension liabilities."

Rising life expectancy and declining annuity rates have worked with falling bond yields to drive up the cost of providing pensions. The crisis facing Britain's pension industrysaw Barclays, BP and the supermarket chain Morrisons all close their final-salary schemes to new members in 2009.

Final salary pensions are the gold standard among retirement schemes, offering a payout related to an employee's final wage. Many new schemes that replace them are linked to investment returns which offer much lower payouts.

Pensions experts expect more employers to close their guaranteed pension schemes to staff this year. At the same time, companies will have to become savvier at managing their pension risks, says Cowling.

"The pension landscape may look bleak at the moment for employers, but there is light at the end of the tunnel – it is possible to get on top of pension worries by implementing an integrated programme of measures to reduce liabilities and risks."

"We believe 2010 could mark a turning point for employers as liability reduction measures become normal and the closure of defined benefit schemes to all employees accelerates, thus capping the growth in new liabilities. 2010 therefore holds up the prospect of being the year when UK plc finally turned the corner in the management of its pension liabilities," he said.