Fears of pension contribution freezes

16 July 2009

Pension deficits have risen to the highest levels ever seen, with schemes run by stockmarket-listed companies estimated to be short by more than £300 billion.

A new report from consultancy firm Deloitte, claims that the cash amount needed by the pension scheme trustees of FTSE 100 companies to plug funding deficits has now exceeded £300 billion. This is more than double the deficit anticipated at the start of this year, and represents the highest ever level.

“The continuing fall-out from the recent financial turmoil means that pension deficits have risen to the highest levels ever seen,” says David Robbins, a partner in Deloitte’s pension consulting practice. “Many companies now face demands for huge contributions to their pension schemes in order to repay losses made on investments.”

The report comes as American Express announces that it is axing pension contributions for all its 6,000 UK staff for 18 months.

The credit card provider previously paid up to 6% into employees’ pensions, but this was suspended on 1 July. The move affects the firm’s stakeholder pension as well as its final salary scheme, which was closed to new entrants in 2006.

It is now feared that other big employers might freeze pension contributions; American Express says it has been forced to do so because the credit crunch means the payment is unaffordable.

Deloitte also warns that more final salary schemes will be for the chop. In June, supermarket Morrison and high street bank Barclays both closed the door on their final salary pensions to new contributions from existing members, while BP closed its scheme to new employees.

Just five years ago, around 40% of companies still offered final salary pensions to new employees. However, pensions expert Ros Altmann says that there are now just four FTSE 100 firms who do so - Shell, Tesco, Cadbury and Diageo.

But closing pension schemes will not wipe out the deficits, warns Robbins.

“Closing the defined benefit pension scheme to all employees is a big step which many companies have previously shied away from,” he adds. “However, with the current unprecedented funding levels in pension schemes and with companies being forced to cut costs in order to remain afloat, we expect to see many more pension schemes closing.”

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