The increase is largely due to the fact that the equity market bounce back in July has not been enough to counter the falling bond yields during July. As a result, scheme asset values have increased by £42 billion, but this has been outweighed by growing liabilities on corporate balance sheets, an increase of £92 billion.
The deficits picture has also not been helped by the steady upward ticking in the outlook for inflation over the last few months.
Source: Xafinity Corporate Pensions Scheme model, based on all UK DB pensions and using FRS17 and IAS19 accounting rules
Hugh Creasy, director at Xafinity Corporate Solutions, said: "The main focus for pension scheme finances needs to be control over investment risk. Sponsor contributions cannot be expected to make a material impact on balance sheets, at least not in the short to medium term; the state of equity markets is more significant, but again is not the main driver.
Managing the financial risks of the changing outlook for interest rates and inflation is the greatest control sponsors can have over the size of the deficit on their balance sheet. The use of leveraged bond funds has allowed sponsors to achieve this control and is now well-established in the marketplace. Even inflation risk – for so long the elephant in the room – is now finally being recognised and consciously addressed. Controlling these investment risks does not mean the end of the deficit, but it can mean the end of the increases in the deficit."
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The Xafinity model draws on the Pensions Regulator's latest edition of the Purple Book, which was published in November 2012. Xafinity's deficit model takes the approach the vast majority of auditors require for corporate balance sheets calculations. This involves judging the difference between yields on nominal and index-linked gilts as the expectation for future retail price inflation. The model uses FRS17 and IAS19 accountancy standards and assumes the total assets and liabilities that all UK Defined Benefit pension schemes would have to disclose to the market.