Companies will have to dig deep to fund their pensions as the true cost of the coronavirus crisis becomes apparent – and many may never have the cash to climb out of the red.
The latest data for March shows that £10 billion was added to the pension deficits of the UK’s 5,422 defined benefit schemes.
The amount owed by companies to their pensions rose from £124.6 billion at the end of February to £135.9 billion by March 31 – and that’s with at least six weeks of lockdown still to endure.
Defined benefit or final salary pensions generally guarantee a retirement income based on years in the job and earnings on retirement.
The employer is obliged to ensure the fund has enough cash to pay the pensions.
However, the gap between the money employers need to underwrite pensions and the amount in the funds makes that £135.9 billion deficit.
Pension experts are warning that retirement savers should do what they can to minimise the impact of the coronavirus outbreak on their investments.
“The impact of the pandemic has made the already enormous pensions black hole even deeper,” said one expert, Nigel Green, CEO and founder of global expat financial advice company deVere Group.
“Those with these UK pensions must be made aware that many of their hard-earned savings could face losses.
“The magnitude of these deficits brings into question the very survival of many company pension schemes and, in order to survive, they might need to consider drastic changes to the terms of employees’ pension schemes.
Safeguard savings warning
“Therefore, sooner rather than later, they should explore the available options to safeguard their retirement income.”
He continues: “UK final salary schemes are in the eye of the perfect storm.
“With most experts now forecasting a major economic downturn, it will become increasingly difficult to fund pension schemes. It can be expected that some firms will find the true cost of operating them increasingly prohibitive.”
Green also explained that the true extent of how the coronavirus crisis has damaged pensions has still to emerge.
“The value of the assets that the schemes invest in and hold is likely to depreciate due to the economic downturn. For instance, there are real and justified concerns over a cooling travel sector, amongst many others, with companies across many different industries issuing profit warnings,” he said.
“The true damage to pension schemes is not always immediately apparent but this £10 billion jump in the funding gap should raise alarm.”