Britain’s biggest businesses have pension black holes that would swallow 70% of their profits and has hit a new peak for the decade following the credit crisis.
The combined pension deficit of the companies in the FTSE350 totals £62 billion.
The figure is at the highest since the credit crisis a decade ago.
The deficit measures the gap between how much firms expect to pay out in pensions and the funds they hold to make the payments.
A trend in people living longer, while returns on investments have dropped have led to the pension gap widening as the liability increases and the funds to pay them shrink.
Knife-edge for companies
Company pensions are on a knife-edge, according to research by actuaries Barnett Waddingham.
The firm suggests that if gilt yields falter, the pension black hole will expand to more than 100% of FTSE350 profits.
The study also reveals that for 21 plc businesses, their pension deficits are more than 10% of their FTSE listed values.
Nick Griggs of Barnett Waddingham said: “Comparing the pension deficit to profits is a simplification, but it helps to put the scale of the challenge into context. Unless companies are profitable over the long term, they can’t generate enough cash to meet their liabilities, including the pension deficit.”
As long as “longevity increases do not provide any nasty surprises”, the problem could be resolved if higher investment returns and rises in long-term interest rates come in.
Economic triggers could narrow gap
“The deficit is essentially the difference between two much bigger numbers, and a few gentle economic triggers could completely change the picture. This is why many companies are not rushing to clear deficits quickly with additional cash contributions,” he said.
The deficit figures are for 2016.
A wider pension survey by consultants PwC puts the funding deficit around 5,800 of the UK’s corporate schemes at £420 billion in July 2017 – a £40 billion drop for the month before.
Although the funding gap narrowed, the shortfall is still more than the figure reported three years ago.
The PwC index puts the UK’s corporate pension liability at £1.97 billion with assets of £1.55 billion.