Pensions black hole keeps growing


The pensions black hole of Britain's 100 largest public companies has grown from around £65 billion to £75 billion over the past year despite improved investment markets and a threefold increase in contributions in recent years.

According to consultants Deloitte & Touche, the increase in the total deficit for the final salary pension plans of FTSE 100 companies is largely due to the effects of falling interest rates.

"While the market value of pension scheme assets has increased over the year by around 15 per cent, this has not been enough," said David Robbins, consulting Partner at Deloitte.

"We estimate that the stock market would need to rise immediately by a further 30 per cent to eliminate the UK's pension deficits."

But Robbins added that firms had finally woken up to the fact that pension deficits are company debt and are beginning to use new and innovative ways to manage this debt.

"These include using escrow accounts, guarantees from parent companies or banks, and liability hedging using derivatives," he said.

As a result, he estimated that the FTSE 100 deficit would fall back to below £65 billion by the end of 2006.

This year has seen the establishment of the Pension Protection Fund (PPF) to act as a safety net for pension scheme members in the case of employer insolvency. From 2006, companies will be required to pay to the PPF a levy depending on the size of their pension deficit and their own financial strength.

The new Pensions Regulator was also established and given powers to police company pension schemes. In particular the Pensions Regulator has demanded faster funding of pension deficits where it believes company actions may adversely affect the security of members' benefits.

The Regulator will oversee new legislation governing pension scheme funding which takes effect from 30 December 2005.

Finally last month, Lord Turner unveiled his proposals for pension reform in the UK, including the introduction of the National Pension Savings Scheme, which may compel employers to make pension contributions on behalf of all of their employees.

David Robbins warned that these initiatives were all placing additional pressure on company pension schemes.

"With the increasing pressure from the PPF, the Regulator, and Lord Turner, we are advising companies that addressing the problem now could save a lot of headaches later," he said.