30 SECOND GUIDE: PENSION DEFICITS

By DAILY MAIL REPORTERS
Updated: 06:26 EST, 6 December 2011

The Daily Mail City team explains why there is a shortfall in the amount of money needed to pay pensioners.

Why is there a shortfall?

Company pension pots are not worth enough to meet future liabilities as people live longer and volatile stock markets take their toll on investments.

Is it getting worse?

Yes. A survey by consultancy firm Mercer showed funding deficits of defined benefit pension schemes in the UK rose 33 per cent to £80billion at the end of November - the highest level this year.

This compares with a shortfall of £60billion at the end of October.

Eye spy: The stock market has been falling, so pension funds suffer

What is behind the deterioration?

Stock market falls are a factor. The flooding of the economy with £275billion of cash (Quantitative Easing) has made matters worse.

As the government buys bonds, yields are driven down and longterm interest rates fall.

This is good news for businesses and homeowners as it is cheaper to borrow money. But when interest rates are low, funds have to set aside more assets to generate enough returns for pensioners.

What can be done?

Companies have been paying in more, increasing employee contributions and closing final salary schemes.

But pension funds remain stuck in a vicious cycle.

Since the financial crisis, funds have cut exposure to risky equity investments and focused on safer, fixed-income products such as bonds.

However the more they buy, the lower the yields and the higher the costs.