The £160bn pensions ‘black hole’ faced by UK companies will damage corporate investment, cut government tax revenues and put a brake on economic recovery, the Confederation of British Industry has warned.
The CBI’s analysis conservatively estimates that extra company pension payments will total £8bn in 2003, £12bn in 2004 and £16bn in 2005. This would mean total annual contributions would have doubled in just four years to £43bn.
The need for these extra contributions will hit profits and hamper company attempts to invest for the expected economic upswing.
With rising national insurance adding to industry’s costs, the CBI says total income will fall, squeezing resources available for investment. Total income is set to decline 0.4 per cent in 2003, 0.6 per cent in 2004 and 0.3 per cent in 2005.
The decline comes at the worst possible moment with finances weakened by economic downturn and firms reluctant to take on debt with corporate borrowing at historically high levels.
As a result, the employers' body says corporate investment will fall by 2.2 per cent this year and will grow on average only 2.1 per cent in 2004 and 2005. This compares with rises of more than 10 per cent during the investment upswing after the 1990s recession.
The expected higher pension contributions alone would mean a shortfall in corporation tax receipts of up to £2bn in each of the next three years. This is because extra company pension contributions are tax deductible.
Ian McCafferty, CBI Chief Economic Adviser, said: "The magnitude of the pension deficit has become a serious concern. It leaves companies caught between a rock and a hard place. It is not the only explanation for low investment but it is a huge part of the problem. The economy will suffer, with the effects rebounding on the government through lower tax receipts."
The pension deficit has risen rapidly because of falling asset values, reductions in annuity rates and rising life expectancy. Although the CBI cautiously puts the deficit at £160bn, other estimates suggest it could be as high as £300bn.
Prudent interpretation of accounting and actuarial standards would require firms to reduce and eliminate this deficit to meet obligations to existing scheme members. The corporate sector must on average do this within 10 to 12 years.
Over the long term, firms may benefit from rises in asset values that will reduce the deficits. But pension valuations are traditionally undertaken in three-year cycles. This means that in 2003, 2004 and 2005, most firms will use recent valuations to decide contributions policy.
Firms may not take the full actuarial hit immediately, but the CBI estimates that contributions will have to rise by between £8bn and £16bn a year.
It says the impact on UK investment will hamper the pace of economic recovery. Corporate investment is now a key economic driver with consumer spending slowing, public spending already rising rapidly and the world economy sluggish.
This means the UK economy will find it difficult to grow by more than 3 per cent annually over the next three years. This is below the stronger rates of growth typical of previous periods of economic recovery.