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Relief for final salary members as pension deficits halve in a month

Sam Brodbeck
Interest rates are rising - which cuts the expense of meeting pension promises made to staff - PA

A "perfect cocktail" of rising interest rates and stock markets has wiped £50bn from the deficits of Britain's "final salary" pension funds over the past month alone.

Corporate schemes must meet the pension promises made to retired staff – but in recent years the value of liabilities has far outweighed schemes' assets. As a result most have been in deficit since the financial crisis.

But the latest figures from the Pension Protection Fund, the statutory "lifeboat" fund, show that the combined deficit of Britain's nearly 6,000 schemes fell from £104bn to £51bn at the end of January. 

Shortfalls are at their lowest level since the start of 2014. The schemes' aggregate funding ratio, a measure of how assets cover liabilities, increased from 94pc to 97pc. 

The recent high-profile collapse of firms with large final salary schemes such as BHS and Carillion has thrust the security of legacy pension funds into the spotlight and left members fearing for their retirement income.

Although pensions paid by failed companies are guaranteed by the PPF, there has been a steep rise in the numbers of people transferring out of schemes. 

The PPF values liabilities on the basis of how much it would cost to insure the pensions on the open market. The yield on government bonds is the main factor, with even tiny movements adding or deducting billions of pounds from liabilities.

What is the Pension Protection Fund?

According to the PPF, the dramatic fall in deficits was caused by a small increase in the yield on 15-year gilts, which offset a small decrease in the overall value of assets.

Markets falls in recent weeks are likely to have reversed some of those gains already, but it is too early to see the effect of this in the PPF's analysis.

Calum Cooper of Hymans Robertson, a pensions consultancy, said the fall was caused by a "perfect cocktail of steady stock market returns as a result of enthusiasm around President Trump's tax reforms, as well as modest increases in gilt yields".

However, he warned that in isolation the figure did not paint an accurate picture of the health of schemes.

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"When the industry starts measuring what matters – the chances of members receiving the pensions they expect in good times and bad – instead of just deficits, we’ll develop investment, covenant [the strength of the guarantees offered by the companies behind the schemes] and funding strategies that will sustainably improve these outcomes for our pensioners," he said.

Companies supporting schemes with deficits are required to produce a "recovery plan", approved by the pensions regulator, usually every three years. This makes the timing of the valuation incredibly important. 

These recovery plans normally lead to millions of pounds of extra funding, which firms have argued prevents them from reinvesting in their business.

sam.brodbeck@telegraph.co.uk