TENS of billions of pounds have been added to pension fund deficits during the past few days because of a sudden further collapse in bond yields.
Pension fund liabilities have already mushroomed during the past 12 months because of sliding yields, but the situation dramatically worsened this week with another lurch downwards.
Actuaries were left open-mouthed on Tuesday when the yield on the benchmark 50-year index-linked gilt collapsed from 0.59 per cent to 0.48 per cent — an unprecedented one-day fall.
Yesterday the yield plunged even farther, hitting a low of 0.41 per cent before rallying back to its starting point for the day.
Long-dated bond yields are crucial in determining pension fund liabilities because they are used to discount future liabilities back to the present day.
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F&C Asset Management said that since the new year alone sliding bond yields would have lifted the total liabilities of a typical pension fund 12.5 per cent, worsening its deficit by as much as 50 per cent.
Derek McLean, head of insurance asset management at F&C, said that the deterioration in deficits would “certainly be in the tens of billions” just for FTSE 100 companies, whose aggregate deficit was last put at £60 billion.
Mr McLean said that few pension funds measured yields on a daily basis. “They will be largely unaware that their deficits will have swollen rapidly in the last few weeks and that the current position will be much worse than at the year end,” he said.
The yield slide was caused by the capitulation of investors who had been positioned for a yield rally. “There’s been a bit of a stampede,” Mr McLean said.