Pension funds face £52bn shortfall

Falling stock markets added £20bn to the shortfalls faced by some of the UK's biggest pension schemes during May, figures showed today.

But despite the recent increase in scheme deficits, pension funds are on average still better funded than they were at the beginning of the year following a rise in bond yields, according to consultancy firm Aon Consulting.

The group said the UK's 200 largest defined benefit schemes, which include all of those offered by FTSE companies, collectively faced a funding shortfall of £52bn at the end of May.

The funds offer workers a guaranteed payment when they reach retirement, usually based on their salary when they leave the company. The deficit is the gap between their liabilities and the value of their pension fund.

Stock market gains earlier in the year had reduced the deficit to £32bn in April, but this trend was reversed as the market lost ground in mid-May.

However, the shortfall is still lower than the black hole of £72bn the companies faced at the end of 2005.

And Aon said the increase in the deficit would have been worse if there had not been a slight rise in bond yields, which impact on pension scheme liabilities.

Corporate bond yields have risen from 4.7% at the start of the year to 5% now, while gilt yields have increased from 4.1% to 4.4% during the same period.

Paul Dooley, senior consultant at Aon Consulting, said: "The stock market falls have been bad news for many pension schemes. However, the greatest risk for most pension schemes is actually a fall in long-dated bond yields.

"These yields are still higher than as at the start of the year and have more than offset the falls in stock markets over the year to date."

He added that companies were increasingly looking to invest in assets other than equities to reduce the volatility of their deficits.

Many firms have also closed their defined benefit schemes to new members, instead offering defined contribution schemes where the payout is based on investment performance.