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Neil Davey

Spotted Zebra

Senior Content Manager

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Recession raising pension fund risks

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While revived equity markets and higher gilt yields have recently led to falls in the UK’s pension fund deficit, the recession has led to a ‘marked rise’ in the long-term risk of pension schemes going bust.

According to the annual ‘Purple Book’ published by the Pension Protection Fund (PPF) and the Pensions Regulator, which reviews the condition of final-salary pension schemes, there was a collective deficit of £78 billion at the end of last October compared with £201 billion at the end of March 2009.

But the 2008/2009 financial year saw a dramatic change in outlook for such offerings, which rely mainly on returns on investment to pay current and future pensioners. The recession, which began in the Spring of 2008, had led to a 5% drop in UK economic output by the first quarter of 2009.

This situation resulted in a sharp increase in the number of company insolvencies, a 29 fall in the value of the FTSE 100 share-index and a sharp drop in the yield from government bonds. As a result, it was likely that final-pension salary schemes would find it more costly to pay out pension funds in future, the PPF said.

The Fund also noted that 240 schemes had applied to be assessed for potential rescue by it by the end of March 2009 compared with only 217 schemes at the same stage the previous year. The PPF was set up in 2006 as a lifeboat for workers who had lost their pensions.

But there was also an ongoing trend among businesses to close their final-salary pension plans to both new membership and new accrual. Open schemes now constitute only 27% of the Purple Book’s sample of 6,885 pension plans, down from 31% in 2008 and 36% in 2007.

It added that some 21% of schemes were now closed to existing members as well as new ones, however. Although it was mainly small employers that took such action last year, large ones are also expected to follow suit in the year ahead.

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Neil Davey

Senior Content Manager

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