Soaring pension deficits may lead to pension trustees demanding more cash, KPMG has said.
But companies struggling in the downturn may need the funds just to keep the business going, the firm added.
Official figures released by the Pension Protection Fund showed that the collective deficit of over 7,800 defined benefit funds in its sample rose from £136 billion in November 2008 to £194.5 billion by the end of the year, based on actuarial assumptions for 179 valuations. And the total deficit of schemes in deficit rose to almost £210 billion, an annual increase of £143bn
Separately, a recent KPMG analysis revealed that the FTSE350 Pension Scheme assets lost £150 billion during 2008.
David Fripp, head of pensions at KPMG in Birmingham, said there was a substantial risk that companies could see demands for cash to pension schemes increase dramatically as anxious pension fund trustees seek to shore up the losses.
But this may not be the best use of the company’s cash, he added, saying it might be more appropriate for companies to decrease pension scheme contributions to protect the business by improving liquidity.
He said: “It is important for companies and trustees to recognise that pension deficits are not the same as bank debt. Pension schemes are wholly tied to their sponsoring company and are very long term compared with bank debt.
“If the company goes down, the pension scheme suffers. Being flexible on contributions may be the key action that helps to ensure the underlying business’s survival, which is what is most important to the pension scheme in the longer term.”
He said companies were reducing costs, often leading to large scale redundancies, and cutting back on capital expenditure and dividends. But this was a difficult tightrope for companies to walk, he said, adding: “There is only so far companies can go on reducing investment and returns to shareholders who ultimately are the source of capital businesses need to survive. Now more than ever, it is crucial that pension trustees work with companies to ensure their future viability and provide much needed financial flexibility.”