Pensions safety net surplus hits £42bn on market rise

The bailout fund for company pension schemes reported a sharp rise in its funding surplus to £42bn yesterday, thanks largely to the 14.4 per cent rise in the value of the stock market over the past year.

The figures will probably be greeted with relief by Britain's increasingly hard-pressed and diminishing band of final-salary pension schemes that pay into the Pension Protection Fund (PPF), set up to ensure workers whose employers go bankrupt do not lose their retirement savings.

In its January update, the PPF said the funding surplus had increased from £21.7bn at the end of December. In total, the funding ratio – a measure of the value of the scheme's assets against its liabilities – improved to 105 per cent from 102.3 per cent.

In total, the PPF now controls 6,560 final-salary pension schemes from employers which have fallen into financial difficulties. Of these, 3,696 are in deficit but 2,864 are in surplus.

Final-salary schemes have fallen into disfavour among employers because of the mounting cost of running them as their members live longer, while regulations become tighter. The PPF was set up after a number of companies collapsed leaving their employees without pensions.

It has wide-ranging powers up to and including the ability to force firms into bankruptcy if it feels their underfunded pension schemes are at risk. The scheme's funding position is dependent on the yields of gilts, or government bonds, as well as on share prices. These also worked in its favour in January. The rise in the surplus needs to be put in context – the highest level was £150bn which was attained in 2007, before the financial crisis.

And while the news that the scheme's funding position is strong will be welcomed by employers, because it will keep the costs of funding the PPF down, the surplus could fall sharply in future months if investment markets move in the wrong direction.