The combined deficit of the UK’s defined benefit pension schemes grew by £100bn over August to reach £710bn, according to figures released in PwC’s Skyval Index.
PwC partner Raj Mody predicted the tough times, brought on by record low gilt yields, would continue for “several years”.
The Skyval Index reached the £710bn figure by measuring the value of liabilities used by pension fund trustees to determine company cash contributions. That figure represented a £220bn year-on-year increase.
However, PwC also measured according to the current cost of a bulk annuity buyout from an insurance company, and found the total deficit increased to £1.54trn.
That represented a £150bn monthly increase, and a £600bn annual increase.
But PwC said the buyout figure did “not reflect the reality for how most pension funds will be managed over the next few years”.
At the other end of the scale, when PwC calculated the total DB deficit according to liabilities shown on company accounts, it fell dramatically, to £490bn. That was a £90bn monthly increase and a £220bn year-on-year increase.
“With the prospect of further action from the Bank of England to reassure the economy in these uncertain times, the challenging environment for pension funds is likely to endure for several years,” Mr Mody said.
“PwC’s recent pensions risk survey showed that half of funds had not protected themselves against falls in long-term interest rates.”
He recommended that trustees revisit their approach to the risk profile of their pension fund, and “ask themselves if gilt yield measurements are still relevant for them when deciding how to measure and finance the deficit”.
“There may be more appropriate measures that are better tailored to their own fund’s strategy. This will give a more realistic view for trustees and sponsors helping them to make more effective decisions,” he said.
Mr Mody’s comments came two days after well-known investment manager Neil Woodford urged DB schemes to wean themselves off gilts and buy growth assets, particularly listed equities.
“Rather than investing in the growth assets that would give a scheme the best chance of meeting the future income needs of its pensioners, asset allocation has instead become an exercise of ‘liability-matching’, ‘de-risking’ and reducing scheme volatility,” Mr Woodford argued.
“To us this doesn’t make sense. If the age-old relationship between risk and return continues to hold true, ‘de-risking’ must also mean ‘de-returning’.”