New research shows the UK’s biggest companies are set to spend as much plugging pension deficits this year as they set aside to meet future benefits for current staff.
KPMG said FTSE 100 companies would reach a tipping point during the coming 12 months in which the cost of trying to close the funding shortfalls of their defined benefit schemes would be equal to the money they set aside to cover new pension benefits earned by workers.
The group said the research was a clear illustration of how unaffordable defined benefit schemes, including final salary pensions, had become.
Major companies have previously set aside twice as much money to meet future pension costs as they have to cover existing liabilities.
But KPMG warned that closing deficits would take up four times as much cash as companies were committing to new benefits within five years.
This would mean that out of every £5 companies spent on their defined benefit pension schemes, £4 would be used to cover past liabilities.
Part of the reason for the shift in funding is that most companies have closed their defined benefit schemes to new members, meaning they have a reducing pool of workers who belong to the schemes as staff leave the company or retire.
But the shift in the ratio also reflects the soaring costs faced by companies with defined benefit schemes, due to falling investment returns and increased life expectancy.
Mike Smedley, pensions partner at KPMG in the UK, said: “Unless companies and their pension scheme trustees can work together to ensure that pension funding can be managed in a way that does not impact on companies’ wider financial flexibility, this is likely to result in more and more companies opting to close defined benefit schemes altogether.”
KPMG said only 12 FTSE 100 companies currently had a surplus in their pension scheme, down from 21 when the same research was carried out last year.
It added that the deficits faced by FTSE 100 pension schemes had doubled from £20 billion at the end of 2007 to £40 billion at the end of last year, and it estimates that the shortfall has doubled again during the first six months of 2009 to stand at £80 billion at the end of June.
The group said 22 per cent of companies would struggle to pay off their deficit in any realistic time frame from their discretionary cashflow, the highest level for three years, although the situation improved if money for dividends and capital expenditure was included.
Figures released by pensions safety net the Pension Protection Fund earlier this week showed that 85 per cent of defined benefit pensions schemes currently have a funding shortfall.