The Pension Protection Fund's (PPF) monthly update for March shows a new record deficit for UK defined benefit (DB) pension schemes, in excess of £250bn.

The aggregate funding position was revealed in the PPF's 7800 Index, which compares pension schemes assets with the approximate cost of paying an insurance company to provide the benefit levels scheme members would expect to receive if their scheme fell into the PPF. The £253bn aggregate deficit represents a funding level of 76 per cent - with £748bn of assets, and £990bn of liabilities on the PPF basis.

Financial consultant Watson Wyatt is concerned that with the £0.7bn a year increase in levies, it would not take a huge proportion of these deficits falling into the PPF to cause serious problems. "The green shoots of recovery have not yet been seen in pension scheme funding - this is the ninth month in the last ten when the PPF has reported things getting worse," commented John Ball, head of defined benefits pension consulting at Watson Wyatt. "Overall, the assets in DB schemes are now sufficient to cover just three-quarters of the benefits that the PPF aims to provide, while 90 per cent of DB schemes would be a drain on the PPF if their employers went bust tomorrow."

Ball fears that should the deficits fall into the PPF's hands, a difficult choice would be forced between hiking up levies on employers and revisiting current compensation levels. "Ministers used to say that the PPF guaranteed pension benefits but that has never really been the case and it's been a while since anyone dared use the 'g'-word," Ball added.

Watson Wyatt acknowledged that this month's figures are particularly significant as one in four DB schemes will look at their funding position at a date close to 31 March 2009.

Employers and trustees will go through the triennial process of agreeing assumptions on liabilities, and plan to repair deficits. "Large deficits mean companies will either have to increase contributions when many cannot afford it or persuade trustees to accept that it will be a long time before their plans become fully funded. Everything indicates that paying for pensions in the past will remain a major drain on company finances for years to come," Ball concluded.

The PPF also revealed that the total surpluses of schemes in surplus in March 2009 fell to £11.1bn from £13.3bn at the end of February 2009.

- Pensions Age April 2009

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