Inflation fears keep pressure on pensions

Published on Saturday 23 May 2009 14:12

THE pressure on Scottish company pension schemes failed to ease last month despite the market rally.

The latest research from Buck Consultants shows that the shortfall faced by Scotland's biggest companies increased by almost 1 billion in April despite a near 10 per cent surge in the value of the FTSE.

Fraser Smart, director for Buck Consultants in Scotland, said the surprise increase in the deficit for final salary schemes was due to growing concerns over the long-term rate of inflation.

Although one measure of inflation, the Retail Prices Index, fell deeper into deflation last week, economists are concerned that inflation could surge above the Bank of England's 2 per cent target in the long-term, which will increase the amount of money companies will be forced to pay out when employees retire.

Smart said: "The month saw a large gain in the value of equities with the FTSE All Share Index increasing by almost 10 per cent over the month from 1,984.17 to 2,173.06.

"This led to an estimated rise of 1.3bn in the value of the assets. However, during the month, a significant jump in expected long-term future inflation to 2.90 per cent pushed liability values up by about 2.2bn."

Smart warned that although the equities market was on an upward curve, closing on Friday at 4365.3, Scottish companies should not rest on their laurels when it came to addressing their pension deficits. Some economists fear that the markets are likely to take another dive before the UK exits the recession.

Smart also cautioned that the yield on corporate bonds was unusually high, leading to companies placing an artificially low value on pension liabilities in their accounts. Added to this was the uncertainty over how the Bank of England's quantitative easing programme would affect both pension scheme assets and liabilities, Smart said.

The recent financial crisis is expected to increase the number of private sector firms moving away from final salary pensions to defined contribution schemes where employees receive no guarantee about how much they will receive upon retirement.

Buck Consultants is one of the leading campaigners against "gold-plated" public sector pensions. It argues that all new civil servants should be moved to defined contribution pensions to ease the growing burden on the public purse.