Deficits at the UK’s private sector defined benefit pension schemes have once again soared to record levels as prolonged ultra low interest rates take their toll on the nation’s savings and investments.

The pension deficits increased by more than £135 billion in the last 12 months to £390 billion at the end of July, according to the latest monthly index from Jardine Lloyd Thompson Employee Benefits.

The pension schemes have liabilites of £1.781 billion but have assets of only £1.391 billion, giving them a current funding level of 78%.

Charles Cowling, Director, JLT Employee Benefits, said although markets had recovered following their initial fall in the aftermath of the Brexit vote, conditions remained challenging for pension schemes.

Cowling said it looked increasingly likely that record low interest rates were here to stay and that pension funds must adjust.

“Many pension schemes have already taken steps to match assets to liabilities, in an effort to protect themselves against adverse movements in bond yields,” said Cowling.

“This has either been through significant increases in bond holdings or through the use of more sophisticated Liability Driven Investment (LDI) strategies, often using derivatives to improve protection.

“In today’s environment pension schemes cannot continue to follow the same strategies that have been used for the last 10 years.

“For those pension schemes that have little or no protection against movements in bond yields, the big question is whether they want to increase interest rate protection now that rates have fallen further to record lows.

“Instinctively, it will be difficult for trustees and companies to hedge interest rates at current levels when they have so far held off doing so in the hope of an interest rate rise – and have seen pension deficits increase as a result.

“By continuing a policy of not hedging interest rates, companies and trustees are effectively taking a large bet against the markets.

“In addition to this, there is also mounting pressure on the Pensions Regulator and pension scheme trustees to ensure sponsoring companies are using all of the levers available to them to reduce pension shortfalls.

“Companies with actuarial valuations this year will be hardest hit and trustees will likely have little option but to demand significant increases in cash funding from companies.”