Pension deficits fall by £84bn as bond yields rise

 UK corporate pension deficits fell by £84bn to £611bn in May according to Xafinity’s corporate pension deficits tracker, cancelling the previous month’s rise of £84bn.

Xafinity says the fall is due to the increase in bond yields, which rose by 0.25 per cent, more than offsetting the drop in the FTSE during the month. 

Xafinity’s figures are based on all UK DB pensions and use FRS17 and IAS19 accounting rules.

Xafinity Corporate Solutions director Hugh Creasy says:  “The big news for pension scheme finances is not the fall in equity values, but the increase in bond yields. As a result the 0.25 per cent increase in bond yields during the month more than compensated for the fall in the FTSE due to speculation about the Fed reeling back on quantitative easing.

“While FTSE had passed 6800 in May, it ended the month at 6583 and has continued going south since.  This is a salutary lesson for those pension schemes that remain exposed to interest rate and inflation risks.  The sheer size of pension obligations, together with the mathematics of long term financial estimates means that, while equity market news hits the front page, the deficit is far more sensitive to these less well publicised indicators. Quite simply the effect of a 0.25 per cent rise in yields equates to the FTSE falling 1000 points. This will, of course, make interesting reading for many FDs looking to report their mid-year disclosures at the end of this month.”