Further blow to final salary pensions as shortfall hits £93bn

MORE employers are set to close their final salary pension schemes when massive funding shortfalls are revealed in their end-of-tax-year results, it has been predicted.

The total pension deficit of the biggest UK final salary pension schemes has nearly trebled in the past financial year, Aon Consulting has estimated. It said the end-of-tax-year accounts of the UK's 200 largest privately sponsored pension schemes will show that the aggregate final salary pensions deficit increased by 57 billion from 36bn in March 2009 to 93bn at 31 March this year.

Deficits have soared over a period of stock market recovery because of a sharp rise in pension scheme liabilities, according to Aon. It said a 118bn rise in assets over the past year had been offset by a 175bn increase in accounting liabilities to 591bn.

Liabilities have increased due to lower corporate bond yields – used to calculate the accounting value of scheme liabilities – and rising expectations of future long-term inflation. With final salary pension benefits linked to inflation, higher inflation expectations mean companies have to put more aside to guarantee future payments.

The number of private-sector employers offering final salary pensions has dwindled rapidly in recent years. Less than a quarter of final salary schemes in the private sector are now open to new members, according to the NAPF, while BA, Vodafone and Tate & Lyle are among the blue-chips to have closed their schemes to existing members in recent months.

Marcus Hurd, head of corporate solutions at Aon Consulting, said rising deficits would prompt even more companies to consider restructuring their pension arrangements.

"It's a harsh reality that you cannot look at pension scheme assets and liabilities in isolation. The financial sophistication is there for companies to hedge a significant proportion of pension scheme risk, so it remains surprising that many are still so significantly exposed," said Hurd.

"On this occasion, however, even those that did hedge their pension risk are feeling the pain, as the pension scheme accounting measure moves back to something nearer reality."

A report published yesterday by the Institute for Fiscal Studies (IFS) estimated that the number of people in private-sector final salary schemes had fallen from a peak of almost six million to less than two million. At the same time, however, the number of public-sector workers in final salary schemes jumped by a fifth to five million. The discrepancy meant that after pension benefits were factored in, public-sector workers enjoyed pay increases at twice the rate as their private sector counterparts between 2001 and 2005, the IFS claimed.