Study: U.K. Pension Shortfall Amount Plummets

April 21, 2004 ( - A rising stock market and increased company pension contributions have wiped some £60 billion off the U.K. corporate pension fund deficit, according to a report by the Confederation of British Industry (CBI).

The report suggests the deficit was around £100 billion at the end of 2003, a reduction of almost 40% on the CBI’s £160 billion estimate from June 2003.   The CBI described the findings, based on FRS17 valuations, as “hugely encouraging” but stressed that the overall shortfall remains enormous and is still a major business concern.

The employers’ organization estimates that firms will still have to make additional contributions averaging £6 billion a year over the next three years. But it points out that this is around half the £12 billion estimate that seemed likely at the height of the pension crisis last spring.

The report shows that constraints on business investment caused by pension funding problems are likely to moderate in 2005 and 2006. But the CBI believes the pension crisis has made the recovery in corporate investment more muted than it would expect at this stage of the economic cycle. It predicts investment growth of 3% in 2004, 5.9% in 2005 and 5.2% in 2006.   This compares with over 10% following the turn of the investment cycle in the 1990s.

“Amid all the bad news about pensions, these findings give reason for a little cautious optimism,” said Ian McCafferty, CBI Chief Economic Adviser. “Firms are still having to make sizeable financial provisions to make up the shortfalls in pensions schemes but the problem is more under control.   The impact on the financial health of the corporate sector is therefore easing, opening the prospect of more vigorous investment spending in 2005 and 2006.”

In a CBI survey published earlier this month, 24% of firms reported that additional pension provisions had had a significant impact on investment plans. The poll also showed firms battling to make up pension shortfalls by increasing contributions.   The average contribution was 16.2% of payroll, but one in four firms gave more than 20% and one in fourteen gave more than 30%.

The CBI survey showed how the pension crisis has triggered a significant shift in the type of pensions being offered as firms respond to the need to reduce liabilities.

Two thirds of firms have kept defined benefit plans for existing employees but only 24% for new employees. Forty one percent of firms switched from defined benefit to defined contribution pension plans over the past two years.

McCafferty argued the government should help employers and employees by offering firms more attractive tax incentives to encourage pension provision. “Employers remain committed to pensions despite the difficult circumstances but we have got to encourage them to stay in the game,” he said.   “There are still enormous liabilities and the shift away from final salary schemes is likely to continue.   Companies are telling us that the government could do more to encourage employers by providing more attractive tax incentives.”