The pension deficits of UK pension funds actually retreated last month, despite the worst stock market performance since early last year.
According to the latest Towers Watson figures, the final results for May are likely to show pension deficits were down by £7 billion ($10.3 billion) because of a drop in the expected future rate of inflation during the month.
The worst UK equity market return since February 2009 contributed to an estimated $16.2 billion drop in the FTSE 350 companies’ pension fund assets during the month, or minus 6.1 per cent for the market overall.
But towards the end of the month, according to the Towers Watson report, the expected inflation average for the next 20 years had slipped from 3.7 per cent to 3.5 per cent.
Subsequently, the total liabilities calculation came in at $26.5 billion lower than a month earlier. The fall in expected inflation pushes up the expectation for real interest rates.
John Ball, head of defined benefit consulting, said the result might seem perverse, but it arose because it was not only stock markets that are volatile.
“An unprecedented combination of economic conditions makes it harder to predict what will happen to inflation over the coming years,” he said. “When inflation expectations jump around, so do pension deficits.”