Companies increasingly turning to unsustainable sources of cash to keep on top of their defined benefit schemes

Hayley Kirton
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Last year, the employers studied paid out over £20bn to make sure their former workers could enjoy their golden years (Source: Getty)

Final salary scheme liabilities are now so out of control that firms are forced to fund them using unsustainable sources, new research has found.

The study by Barnett Waddingham, seen exclusively by City A.M., discovered just less than a third (30 per cent) of the listed companies it examined either used external sources of finance or drew on their cash reserves to keep up with contributions under their defined benefit (DB) schemes in 2015.

By comparison, only around a fifth (22 per cent) had to resort to these measures in 2014.

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"The future funding needed to meet DB pension obligations is another unwelcome area of uncertainty magnified by the vote to leave the EU," said Nick Griggs, head of corporate consulting at Barnett Waddingham. "The increasing size of these deficits is well known, but our research shows how this comes at a time when deficit contributions were already placing a considerable strain on companies and their ability to invest for sustainable future growth."

The employers in the Barnett Waddingham study shelled out over £20bn between them to their former employees in 2015, while the government forked out around £90bn in state pension payments.

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The recent referendum result has done little to improve the state of the UK's DB pension pots. Figures from Hymans Robertson showed the collective DB scheme deficit in the UK rocketed by £80bn by midday on the day the Leave decision was announced.

Meanwhile, Pension Protection Fund calculations released earlier this month showed the total deficit across the 5,945 schemes eligible to be placed in the fund's protection had mushroomed from £294.6bn at the end of May to £383.6bn at the end of June.

Darren Redmany, head of Lincoln Pensions, told City A.M.: "Following Brexit, it looks like schemes and sponsors will have to work together for longer to solve their deficit problems. Borrowing to consistently fund contributions to pension schemes isn't sustainable and rebalancing needs to occur that is fair to schemes and sponsors based on covenant strength."

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