UK companies face 100bn pension top up

According to new research, British businesses face a £100bn drain on their finances over the next three years to top up ailing final salary pension schemes.

The research from Pension Corporation warns that the cost of plugging soaring pension deficits threatens to eat up as much 13% of companies’ total £750bn of cash balances, diverting money away from vital investment in jobs and growth. The extra funding is needed despite £80bn of deficit reduction payments made by business in the past three years.

The Bank of England’s £325bn quantitative easing (QE) programme has been blamed for causing the shortfall, by forcing down gilt yields and making it more expensive to buy annuities. Pension Corporation has estimated that QE added as much as £74bn to pension deficits.

Britain’s safe haven status has added to the problem because strong demand for gilts has also pushed down yields.   A spokesman from risk management specialists Pension Corporation said; “UK plc has been swimming hard upstream, with lots of effort being expended, but not making any real progress against the powerful deficit current.”

They also warned that soaring deficits could force more final salary pension schemes to close. “Trustees with open schemes remain fearful that even these will be closed to future accrual because of the ever increasing burden placed on companies.”  

Only 16% of UK final salary pension schemes in the private sector remain open to new members, according to the Pension Protection Fund, while 24% have been closed to future accrual for existing members. The decline in pension provision has accelerated rapidly since 2006, when 43% of schemes were open to new members and just 12% were closed to future accrual. The vast majority of open final salary pension schemes are in the public sector.

Companies have been at the mercy of turbulence in pension markets for years now. At the last wide-scale triennial valuation of deficits, they found themselves in difficulty because shares prices had declined dramatically in the wake of the collapse of Lehman Brothers and the global recession.

Pension fund assets have performed reasonably well this time, but their liabilities have soared due to the falling gilt yields, which are used as a proxy for future costs.

Despite the £80bn of payments, deficits have widened since 2009 – “putting pension plans some £110bn behind their targets”, Pension Corporation warned.

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