Firms’ pension plans face a soaring deficit

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THE total deficit of final salary-linked company pension schemes has increased by £35bn over one month, according to a new report.

The deficit has risen despite millions of pounds being spent by British companies to meet spiralling retirement costs,

The Pension Protection Fund calculated that the aggregate deficit of 6,316 defined benefit (DB) schemes – representing about 12 million members – shot up to £236.6bn in March from £201.5bn in February

Repeated rounds of central bank easing have contributed to a sharp drop in the yield on British government gilts – a staple investment for pension funds – making it more expensive for funds to match income to liabilities unless they add riskier, higher-yielding assets to portfolios.

Britain’s top 100 firms injected £12.7bn into their pension schemes to make up funding gaps, while several companies have closed their final salary pension scheme to new members or are freezing pensionable salaries, according to data from JLT Pension Capital Strategies.

“The underlying picture is clear: despite the huge sums that companies have paid into their pension schemes, deficits have got bigger,” said Adam Boyes, a senior consultant at Towers Watson, the global professional services firm which has a base in Leeds.

Benefits under these DB schemes are pre-determined using a formula based on salary and duration of employment.

The number of schemes in deficit increased to 5,080 – accounting for 80.4 per cent of the total DB schemes in the PPF. The deficit is worse than last year, the PPF report said, when a deficit of £204.2bn was recorded at the end of March 2012.

“For some employers who closed their final salary schemes to new entrants a long time ago, this will be another reason to consider stopping existing members from building up further benefits as well,” Mr Boyes said.

According to Towers Watson, employers and pension fund trustees will often have to choose between higher contributions and leaving their pension schemes in deficit for much longer, when they agree funding plans based on current market conditions.

Pension schemes typically undergo an actuarial valuation once every three years.

Many of the trustees who must devise plans to repair scheme deficits face significant challenges. According to Towers Watson, remaining on track to pay off deficits within the timescales previously agreed, could require employers’ annual contributions to double.

A spokesman for Towers Watson said: “Alternatively, avoiding any increase in contributions could force trustees to put back the dates by which they expect their schemes’ shortfalls to be eliminated by a decade or more. One reason for this is that index-linked gilt yields have fallen to record lows at the worst possible time for the employers concerned.”

Towers Watson said that, in most cases, both assets and liabilities will have increased significantly since April 2010 but deficits will be much bigger in cash terms, and harder to pay off.

John Ball, of Towers Watson, said: “Many employers will find the substantial sums injected into their pension schemes have not even allowed them to stand still. If a scheme’s plan to clear its deficit is behind schedule, the response will usually involve some combination of pedalling harder to catch up, and accepting that it will take longer to reach the destination.

“This is an uncomfortable trade-off, so there may be more interest in alternative solutions such as using some of the employer’s other assets to shore up the pension scheme as well as paying in cash.”