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Pension deficit hits £100 billion, deficits could increase by a further £40 billion over next year

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Pension deficits have ballooned to the £100 billion landmark but the knock-on effects of the austerity measures announced in the Budget are likely to add to the woes of companies sponsoring final salary schemes over the next few years.

However, in the long-term those measures will eventually start to erode the final salary debts of companies if the economy improves, according to Aon Consulting, the leading employee benefits and risk management firm. The aggregate pension fund deficit shown in company accounts for the 200 largest UK privately sponsored pension schemes increased from £88 billion in May to £100 billion at the end of June.

In the short term, the fiscal measures introduced in the Emergency Budget are likely to increase final salary pension scheme deficits. The reduced issuance of government securities (gilts) relative to previous expectations, combined with slower economic growth, are both likely to reduce the yields available on gilts and so increase the value placed on final salary scheme liabilities. A 0.5% fall in gilt yields would increase the value of the Aon200 final salary scheme liabilities by circa £43bn to £143bn.

Over the longer term, however, as the tough economic measures take effect, financial conditions will change and those changes are likely to be more favourable to final salary deficit. It is likely that the strengthening of the economy will lead to increased yields available on gilts and, thus, a reduction in the value placed on final salary liabilities. An increase in gilt yields to 1.0% above current levels would reduce the Aon200 deficit to a mere £25bn from its current level of £100bn.