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UK plc could face £100bn pension deficit bill

Companies could be forced to use 13 percent of their cash piles to plug spiralling deficits

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UK’s companies could soon face “a perfect storm” of legislative and economic conditions that force them to pay a £100 billion bill for pension scheme deficits over the next three years, according to a new study on Tuesday.

If UK plc were forced to pay the bill to plug rising deficits in UK pension schemes, it would leave them with little extra cash for dividends, stock buybacks and capital investment.

Companies could be forced to use 13 percent of their cash piles to plug spiralling deficits that could yet worsen, according to the Pension Corporation (PIC), a specialist pension manager.

"Excessive costs caused by too much misguided legislation, poor matching of investments and liabilities and the overall economic environment have combined to create a perfect storm," said David Collinson, co-head of business origination at PIC.

Companies are required to fund any dramatic shortfalls that crystallise during triennial valuations, which can be an immediate hit on cash flow.

The aggregate deficit of the UK's 6,432 defined benefit schemes increased to £216.8 billion at the end of April, compared with a surplus of £2.3 billion a year ago, data from the Pension Protection Fund (PPF) shows.

Although companies have paid more than £80 billion into their pension schemes over the previous three years, dwindling asset returns and lower bond yields, a staple investment of pension funds, have put pension funds £110 billion behind target, estimates PIC.

The cost to Britain's pension industry of the Bank of England's £325 billion pounds of QE to date could total £270 billion pounds, as yields on gilts, used to calculate liabilities, have plummeted, making it more expensive to pay for future liabilities, the National Association of Pension Funds (NAPF) estimates.

The Pensions Regulator, which approves all funding commitments, rejected calls to make allowances for the change in its first annual statement on funding conditions published in April, but said struggling employers, of which there could be about 300, may be given greater breathing space to plug funding holes.

"What many in the pension system fail to realise - or, worse, are afraid to say - is that those members who hope to start drawing their pension in the next few years or decades will not necessarily be getting what they were promised today," said Collinson.

PIC has around £5.5 billion in assets and has insured almost 60,000 pension fund members from FTSE 100 companies, multinationals and the public sector.


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