UK pension schemes enjoy record month

Pension schemes in the UK have had their biggest ever one-month improvement in recent weeks thanks to rising bond yields - this follows a sharp fall in liabilities, moving in the opposite direction from interest rates.

The Pension Protection Fund (PPF), the industry-funded insurance body that acts as a safety net when employers become insolvent, claimed that the average value of liabilities dropped by a remarkable £71 billion over the course of May.

The aggregate shortfall at the end of May totalled £185.5 billion, down from £256.6 billion only one month earlier.

Joanne Shepard, senior consultant at actuaries Towers Watson, told the Financial Times: "This happened because the interest rate on government bonds increased sharply in May and the PPF's measure of liabilities is very sensitive to this."

Pension schemes have latterly been raising their exposure to bonds, with the theory being that this asset class should rise in tandem with its liabilities. However, many are still fairly exposed to equities, with employers hoping a bull market will allow them to reduce cash contributions.

"In cash terms, the £71 billion fall in the aggregate deficit is the biggest month-on-month improvement in the aggregate funding position since these numbers were first calculated in 2005," added Ms Shepard.

To lay out the methodology by which it calculates month to month changes, the PPF said that a 7.5 per cent rise in equity markets would boost aggregate asset values by 2.7 per cent.

The PPF is a statutory fund run by the Board of the Pension Protection Fund, a statutory corporation established under the provisions of the Pensions Act 2004. It was launched in 2005 to address public concern over what would happen to employee pension funds when employers became insolvent, a growing problem in the current financial climate. Lady Barbara Judge is the chairperson.

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