Recession placed pension funds at risk

21 January 2010

The recession increased the danger of some pension funds collapsing.

In its annual review of defined-benefit pension schemes, the Pension Protection Fund (PPF) said that a combination of fund deficits, reduced economic prospects and the threat to the stability of many companies has contributed to the risk.

The recession, which began in early 2008, produced a decline of 5 per cent in the UK’s economic output and a 29 per cent fall in the value of the 100-share index.

There was also a corresponding drop in the yield on government bonds.

The effect was to hit the stock market returns on which many firms depend for the funding of their pension schemes and to make pension payments more costly in the future.

The PPF report said: “The recession increased the risk of insolvency for companies sponsoring defined-benefit schemes while financial market movements worsened scheme funding.”

Also noted in the review was the increasing trend towards closing pension schemes to new and existing members.

“The proportion of schemes open to new membership and new accrual continues to decline. Open schemes constitute 27 per cent of the 2009 sample, down from 31 per cent in 2008 and 36 per cent in 2007,” the report continued.

Some 21 per cent of schemes were shut to existing members as well as new recruits.

As the economy has moved into recovery, so the deficits among defined-benefit pension schemes have been reduced. By the end of last October, the collective shortfall was £78 billion.

However, Alan Rubenstein, the PPF’s chief executive, pointed to the problems that pension funds have faced during the recession.

Mr Rubenstein said: “This year’s review highlights how the dramatic deterioration in the economic and financial environment during 2008-09, not just for the UK but for most major economies, led to heightened risk for the schemes in the PPF universe.”

Tony Hobman, the Pension Regulator’s chief executive, added: “The data reflects the situation faced by schemes up to March 2009. While there has since been an upturn in the financial markets, we remain alive to the risks and continue to work with schemes on their recovery plans.”