£130 bn pension black hole

2005

British companies face a gaping pensions black hole of some £131 billion, with the overwhelming majority of final salary company pension schemes still deep in deficit, a new report has found.

Nine out of 10 of the final salary (also known as defined benefit) schemes surveyed by the Association of Consulting Actuaries (ACA) were in deficit even though most have increased both employer and worker contributions to reduce the shortfall.

The ACA survey, completed by 392 firms with over 2.8 million members, found that contributions in final salary schemes have increased from 15.8% in 2002 to 22% of earnings today.

Employer contributions have risen more than employee contributions since 2002 - employers up by 5% and employees by 1.2%, even though 44% of firms have increased employee contribution rates over the last few years.

But almost without exception, this increase in contributions is not funding benefit improvements but is going towards reducing scheme deficits.

As a result, the average fund deficit has eased slightly over the past year, with schemes 85 per cent funded on average, compared with 80 per cent in 2004.

But nearly half the firms quizzed said they thought it would still take at least 11 years to close their deficit.

The survey also revealed that the move away from final salary schemes is showing no signs of abating, with almost seven out of 10 (68 per cent) of final salary schemes now closed to new entrants and one in 10 closed to new accruals.

More than four out of 10 firms are also looking to reduce current spending on pensions while more than nine out of 10 said that they will have reviewed their pension arrangements over the next two years.

ACA Chairman, Adrian Waddingham, said that the figures highlighted that the number of employees in Britain who are covered by any form of occupational scheme is in "quite rapid decline".

"In part this is down to increased longevity and weak investment returns, but added regulatory and government-led enforced benefit improvements have not helped at all," he said.

"That is why the ACA is calling on the new government to act to improve the Basic State Pension to a level that meets essential living costs, with private pensions built on top of this higher State pension.

"Additionally, we want to see greater incentives offered to encourage firms to offer schemes of a good standard, including lower-cost defined benefit schemes offering a lower targeted benefit related, for example, to career average earnings.

"What is concerning for the future, exposed by this latest survey, is that firms are more fearful of the impact of legislation on benefits and funding costs than anything else," Waddingham added.

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