Some of Britain’s biggest companies are thinking about going bust as the cash they owe their pension schemes is worth more than 20% of the company’s market value.
The firms – all FTSE 350 listed – have ploughed more than £35 billion into their pension funds over the past three months only to see just over £4 billion wiped off the deficits.
In total, the firms owe just short of £65 billion to the funds, say pension consultants Barnett Waddingham.
The problem for many of the firms is that they do not know how much they need to pay out on defined benefit pensions.
Although many businesses are making money, much of the growth is diverted to boosting pension funds, so cannot be spent on developing the business.
Soaking up cash
“The Pensions Regulator’s new statutory objective should go a long way to resolving this problem,” said a spokesman for the consultants.
“Our research confirms that defined benefit deficits are soaking up a lot of cash, which obviously damages growth plans and investor returns.”
Calculating a pension deficit involves considering several factors, like pension benefit guarantees to past and present employees, how long they live to draw the benefits and investment returns.
Defined benefit schemes pay a guaranteed amount for life regardless of the performance of investments and contributions to top up the fund by current workers – and any deficit has to be made up by the employer.
Many companies have closed the door on defined benefit schemes to new employees, but have to keep the scheme running until the youngest person in the scheme dies.
Now, employees can expect a pension based on income from an annuity they buy with their accumulated retirement savings – called a money purchase pension.
Limiting contributions
In some cases, employers match or even offer double what the employee contributes to the fund as an incentive to save.
Barnett Waddingham also explained that employees in money purchase schemes could be suffering because of the cash employers have to put into defined benefit funds – and that contributions need to be increased if they are not match the payments under a defined benefit scheme.
Money purchase scheme average contributions are around 9% of a worker’s salary, compared with 19% under a defined benefits scheme.
“The money that is going into these schemes is limiting the contributions employers are making on money purchase schemes,” said the spokesman.
“In turn, this reduces the funds and their investment potential, which could leave an employee with a smaller pot to fund an annuity when they retire.”
