Pension crisis looming as UK firms face £800bn black hole

Companies are facing an £800 billion pensions black hole which has almost doubled in size in the past decade, a report has warned.

The warnings come amid a period of low returns on investments and higher life expectancy. Picture: Ian Georgeson

It comes amid a period of low returns on investments and higher life expectancy. Politicians said the threat to the savings of workers in the UK meant the pensions industry was facing a crisis.

The gaping hole in defined benefit (DB) pension schemes soared from £425bn to £800bn since 2006, despite employers pumping in contributions worth £160bn, the study has found.

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It warned that each final salary policy could see a gap of as much as £73,000. Firms have been hard hit by low interest rates and falling commodity prices, as well as people living longer – which has left an ever-growing funding gap for final salary pension schemes.

The study by JLT Employee Benefits predicts that the total actual cash flow schemes will have to pay out could reach £3.6 trillion. If low interest rates remain companies will
have to stump up £220bn in extra contributions over the next decade to reach the deficit levels of 2006, the report said.

Scottish politicians last night said the findings showed the savings of the workforce would be at risk.

Liberal Democrat leader Willie Rennie said: “Pension schemes are there to ensure older people can enjoy their retirements in dignity. These are people who have worked all their lives.

“These reports are deeply concerning and we need to see urgent action to ensure that people’s money is protected.”

Labour’s shadow Scottish secretary Ian Murray said: “These figures give everyone who has these type of pensions cause for concern.”

And Ian Blackford MP, pensions spokesman for the SNP, said: “These figures are truly staggering. But this is totally predictable after years of catastrophic Westminster mismanagement.

“It goes back to Gordon Brown’s decision as chancellor to remove tax relief for dividends and George Osborne’s hopeless inability to meet any of his targets on the deficit or growth.

“A low interest rate environment, coupled with a quantitative easing programme that is not stimulating sustainable growth is depressing interest rates and consequently yields.”

Alex Johnstone, a Conservative candidate in North East Scotland, said: “These problems have been brewing ever since Gordon Brown as chancellor raided pensions.

“The Conservatives in opposition and in government have sought to address this, but we do need to take action to close this gap in pensions.”

Murray Wright, actuary and consultant at pension consultants JLT, said pension schemes cannot follow the same strategies they have used over the past ten years.

He said: “Our analysis highlights that DB pension schemes across the UK should take a serious look at how they plan to close deficits.

“There is a £2.3tn cashflow shortfall that needs to be met by a combination of contributions from sponsors and future investment returns. Trustees and employers should ensure they are using all the levers available to them to stop pension shortfalls from spiralling out of control.”

The study comes as financial markets have become increasingly volatile in recent months amid falling commodity prices, low interest rates and a slowdown in economic growth in China.

Financial stocks have also come under fire amid concerns from investors they are not holding enough capital to withstand an economic shock on par with the banking crisis of 2008.

The average life expectancy for people in the UK rose from 75.7 years in 1990 to 81 in 2013, according to figures published in medical journal The Lancet last September.