Pension funds face long battle to plug deficits

Ben Southwood
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FIRMS face a longer struggle to fill the holes in their troubled pension funds, a study from PwC showed today.

The average pension scheme will need some 11 years to plug the deficit, PwC predicted, up from the eight years it predicted in 2011.

The time firms needed to balance their schemes’ books had shrunk between 2009 and 2011 from 11 years down to eight years, but it has bounced back up, PwC says, given heavily depressed gilt yields and economic uncertainty.

Over 91 per cent of the 98 defined benefit schemes surveyed were in deficit – and 57 per cent were deeper in the red than last year. This is despite the fact that last year also saw an increase in deficit repayment contributions.

“The difficult market combination of low gilt yields and Eurozone uncertainty is hitting pension schemes hard,” said Jeremy May, pensions partner at PwC.

“Many companies now face the stark choice of ploughing considerably more cash into their pension scheme, or being saddled with the debt for longer,” he added.

“In many cases, lack of cash availability means the decision is simple,” May added.

But on the whole firms responded by paying more in, rather than planning on holding the debt for longer, the data showed.

Seventy-nine per cent of firms which had bigger deficits increased repayment contributions to fill the hole, whereas 43 per cent increased the length of their recovery plan.

Despite the parlous state of many pension schemes, and their reliance on gilts, May warned against “smoothing” yields. “Smoothing can mask the true position and produce unintended results,” he said.

This report comes as the number contributing to private sector employer-based pension schemes declined to just 2.9m, from a high of over 8m in 1967, according to data from the Office for National Statistics released last Thursday.

Pensions minister Steve Webb said last week that this decline only added to the case for auto-enrolment, which will be rolled out from October.