£130bn deficit in UK private pensions

This is just another scary FT story about pensions. Nevertheless, as the year closes, it is a timely reminder that the vast majority of UK workers over 40 are heading for a retirement marked by grinding poverty.

The UK private pension system is busted and broke. It is time to wake up and smell the financial catastrophe before us. It is time to break the habits of the last twenty years; we need to cut back on consumption and seriously start saving.

A new year's resolution perhaps?

Auditors are pressing companies to reconsider how they calculate their pension liabilities and urging them to use formulas that could give rise to much larger reported deficits than would be the case if they stayed with the current approach.

Market volatility has raised questions over the so-called “discount rate” used to calculate the present-day value of a fund’s future liabilities.

The lower the rate used, the higher the present liabilities will be. The rates currently used by companies to calculate those liabilities are roughly equivalent to those on less risky high-grade corporate bonds.

However, these have soared amid the market turmoil, sharply shrinking reported fund deficits. Some schemes have actually reported a surplus even as the values of the stocks they hold have plunged.

Two recent reports illustrate the effect that changing the discount rate can have on scheme finances. Aon, an actuarial consultant, calculated this week that the 200 largest private employers’ schemes had actually seen funding improve over 2008, ending the year with an aggregate surplus of £3bn due to rising bond yields.

But Deloitte, using discount rates about one-half to one full percentage point above gilt yields, calculates FTSE 100 companies ended the year with a £130bn deficit.