Pension funding deficits 'nearly a third of UK GDP'

Britain's mammoth funding gap for gold-plated company pensions stands at nearly a third of the country's economic output despite a £50 billion boost in November.

A report by PricewaterhouseCoopers shows the deficit for so-called defined benefit pensions - such as final salary schemes, which guarantee an income in retirement - narrowed by £50 billion to £580 billion last month.

This marks the third month in a row that the funding gap has improved after hitting a record high of £710 billion in August.

But the pensions black hole is still £110 billion higher than it was at the start of the year and is equivalent to almost a third of the UK's entire gross domestic product (GDP).

PwC's Skyval Index gives a snapshot of the health of the UK's 6,000 defined benefit pension funds.

It reveals the battering that pension schemes have taken since the Brexit vote, with rock-bottom interest rates taking their toll after the Bank of England halved its base rate to 0.25% in August.

BT recently revealed its pension deficit surged to £9.5 billion at the end of September from £6.2 billion three months earlier.

Barclays has also seen its pension fund slip into the red by £1.1 billion from a surplus of £800 million last December, while Debenhams likewise suffered a reversal to a £4.1 million deficit in September against a surplus of £26.2 million in August last year.

Firms have blamed a sharp reduction in bond yields, which increases the pension liabilities, as a result of the Bank's economy-boosting action after the EU referendum vote.

This peaked in August, when the pension deficit shot up by £100 billion, with bond yields since having recovered a little.

Businesses are now under pressure to pump cash into their company schemes to address the shortfalls, especially after BHS's £571 million pension deficit contributed to its high profile collapse in April.

But Raj Mody, partner at PwC and global head of pensions, said companies should have realistic funding plans in place over longer timescales - up to 20 years rather than the nine or 10 year average.

He said: "Pension funding deficits are nearly a third of UK GDP. Trying to repair that in, say, 10 years could cause undue strain, akin to about 3% per year of potential GDP growth being redirected to put cash into pension funds.

"This would be like the UK economy running to stand still to remedy the pension deficit situation."