U.K. plc facing 100 billion pound pension bill: Study

British companies could be forced to use 13 per cent of cash piles to limit deficits
By Anjuli Davies
|hrreporter.com|Last Updated: 05/25/2012

LONDON (Reuters) — United Kingdom plc could face a 100 billion pound bill over the next three years to plug rising deficits in its pension schemes, new research shows, limiting cash available for dividends, stock buybacks and capital investment.

British companies could be forced to use 13 per cent of their cash piles to plug spiralling deficits that could yet worsen, according to the Pension Corporation (PIC), a specialist pension manager.

"Excessive costs caused by too much misguided legislation, poor matching of investments and liabilities and the overall economic environment have combined to create a perfect storm," said David Collinson, co-head of business origination at PIC.

Companies are required to fund any dramatic shortfalls that crystallize during triennial valuations, which can be an immediate hit on cash flow.

The aggregate deficit of the U.K.'s 6,432 defined benefit (DB) schemes increased to 216.8 billion pounds at the end of April, compared with a surplus of 2.3 billion pounds one year ago, data from the Pension Protection Fund (PPF) shows.

Although companies have paid more than 80 billion pounds into their pension schemes over the previous three years, dwindling asset returns and lower bond yields, a staple investment of pension funds, have put pension funds 110 billion behind target, estimates PIC.

The cost to Britain's pension industry of the Bank of England's 325 billion pounds of QE to date could total 270 billion pounds, as yields on gilts, used to calculate liabilities, have plummeted, making it more expensive to pay for future liabilities, the National Association of Pension Funds (NAPF) estimates.

The Pensions Regulator, which approves all funding commitments, rejected calls to make allowances for the change in its first annual statement on funding conditions published in April, but said struggling employers, of which there could be about 300, may be given greater breathing space to plug funding holes.

"What many in the pension system fail to realize — or, worse, are afraid to say — is that those members who hope to start drawing their pension in the next few years or decades will not necessarily be getting what they were promised today," said Collinson.

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