The UK's pension liabilities will hit £1,204bn by the end of 2009, despite substantial improvements in global equity markets, warns Xafinity Consulting.

Although corporate bonds yields hit all time high yield spreads in June 2009, Xafinity believes this could be short lived and if history were to repeat itself, UK pension scheme liabilities could rocket. Corporate bond yields have, Xafinity said, reversed, and using the Corporate UK Pensions Scheme model with a yield of 5.5 per cent and an increased inflation outlook, liabilities are estimated to have risen over the year by around 45 per cent from £823bn to £1,204bn by December 2009.

Xafinity is therefore urging firms not to be complacent, as liabilities are and may continue to outstrip asset increases over the year.

Robert Hunt, corporate solutions director at Xafinity, said: "At the moment it looks like liabilities are winning - up by around 45 per cent over the year, compared to the FTSE All Share Index which is up by around 27 per cent.

"The introduction of additional allowances for future mortality improvements at the end of the year is another factor that could increase liabilities. If current trends continue, this could add two to three years to the average life expectancy of pension scheme members leading to an increase in liabilities of around eight per cent.

"Add in the gearing effect and you could see a very significant increase in the deficit disclosed in your year end accounts."

UK companies must therefore get a true hold and understanding on their current position.

"One of the areas that can have a significant impact on scheme liabilities is the longevity assumptions being used. For example, increasing life expectancy by three years would increase the UK pension deficit by £99bn."

Xafinity said bond yields returning to near pre-credit crunch levels, long-term inflation at a rate of around 0.5 per cent higher than at the start of the year and an increase in life expectancy of future pensioners of two years are all factors which affect pension deficit positions. However, stronger year-end assumptions will lead to higher future service costs in 2010, and a significant downward movement in corporate bond yields will greatly affect the funding and accounting of defined benefit (DB) pension schemes, and companies should not be lulled into a false sense of security at this time, Xafinity said.

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