Pension schemes run by some of Britain's biggest companies are sitting on a cumulative funding gap of more than £100bn, as low bond yields crimp returns and send liabilities to record highs, according to Mercer.
The consultant's latest Pensions Risk Survey reported the aggregate deficit for defined benefit schemes stood at £108bn at 30 April, compared with £89bn at end-March. A drop in long-term inflation assumptions in April was not enough to offset the effect of the sustained fall in high-quality bond yields, which helped push total liabilities up to £665bn from £641bn in March.
Repeated rounds of central bank easing have contributed to a sharp drop in the yield on British government gilts – a staple investment for pension funds – making it more expensive for funds to match income to liabilities unless they add riskier, higher-yielding assets to portfolios.
Defined benefit schemes pledge to pay members a fixed annual pension based on a formula influenced by length of service and final salary earned. If annual returns from the investment portfolio falls short of the sum they need to pay out, companies are obliged to make up the difference.