15 years to clear pensions deficit

2005

Despite a reduction of a quarter this year in the size of the pension 'black hole' facing British companies, it could still take 15 years to clear their deficits, according to a new report.

Figures from professional services firm Deloitte have found that the total deficit for the final salary pension plans of UK companies currently stands at £100 billion, a big fall on the £130 billion at the start of the year.

The deficits of FTSE 100 pension plans have also decreased to £52 billion from to £65 billion at the start of the year.

The improvement is largely due to a healthy return of 10 per cent on the stock market since 1 January.

But even so, at the current rate of company contributions, it will take more than 15 years for deficits to be cleared.

However Deloitte predicts companies will increasingly look to scrap their deficits in one full swoop by borrowing cash and putting it into a pension plan.

Consulting partner at Deloitte, David Robbins said that companies can receive near-immediate tax relief on pension plan contributions.

"Paying the deficit off over 15 years or more, means the tax benefit would only be achieved over that period, whereas borrowing money to fund the whole deficit accelerates the tax break."

Companies who immediately clear their deficits could also gain from a reduction in their levy to the new Pension Protection Fund. This levy could amount to more than £10 million a year for some of the UK's largest companies. From April 2006, the levy will, in-part, depend on how well-funded the pension plan is: the deeper the deficit the larger the levy.

"The decision to eliminate a deficit by borrowing depends on the company being able to obtain competitive interest rates, which often depends on the extent and security of existing loans," Robbins said.

"However, right now there are a number of banks willing to support company finances."

And he added that shoring up pension plans was seen as an increasingly important recruitment and retention tool for large firms fighting for skilled staff.

"Employees who read stories in the press about pension deficits want reassurance that the benefits in their own scheme are fully funded and secure," he said.

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