Pension fund black hole much bigger than previously thought

A recent report from the Pensions Regulator states that the UK’s pension fund liabilities exceed pension fund assets by £440bn. The calculation is now a little out of date as it was made on March 2006, so given that bond yields and equity markets have both risen since then, an up-to-date calculation would likely show that pension fund deficits are now marginally smaller. Nevertheless, the estimate of £440bn is considerably higher than many of the deficit figures that have been published in the media over the past few months.

 As we have previously argued in this blog, pension fund deficits will shape financial markets and particularly bond markets over the coming years, as companies purchase long dated assets to match with outstanding pension fund liabilities. The £440bn estimate suggests that the pension fund crisis will have an even larger impact than we thought – to put this number in context, the size of the long dated gilt market and long dated corporate bond market combined is around £210bn.