Pension Deficits Haunt 32% of FTSE Firms

(August 31, 2010) — Thirty-two percent of FTSE 100 firms are struggling to fill gaps in their pension deficits from current discretionary cash flow, a recent study by KPMG shows, with pension deficits of FTSE 100 companies jumping by £15 billion this year to £65 billion.

“At first sight, these figures look alarming, but they mainly reflect the consequences of the economic downturn on companies’ profits and cash flow,” Mike Smedley, pensions partner at KPMG, said in a statement. “The key message to sponsoring companies, pension fund trustees and regulators is to maintain a long-term view and avoid knee-jerk reactions.”

With £2 out of every £3 in 2009 being spent on deficit reduction, the firm’s Pensions Repayment Monitor survey showed companies are spending more on deficits than funding pensions for current staff. Total employer contributions paid to defined benefit schemes increased from £14 billion in 2008 to £17.8 billion in 2009 in the midst of rising demands to fund deficits following the economic downturn, KPMG’s research revealed. Many companies have already closed their final salary schemes to new members as they are too expensive to run.

According to the study, 46% of the FTSE 100 would be able to pay off pensions deficits from discretionary cash flow in a single year, and 63% in three years, compared to 62% and 75% respectively in 2008.

While KPMG’s study does not pinpoint those firms with the least affordable pension shortfalls, the study does indicate blue chip companies with some of the largest deficits, including BT, British Airways, and utility groups with high capital expenditure commitments such as National Grid.

Pension fund deficits that are increasingly plaguing pensions in the UK is also reflected by the growing demands put on the Pension Protection Fund (PPF), which backstops failed corporate pensions, as experts have warned that the fund is being overstretched and may soon have to reduce the amount it pays out.