Data released by Xafinity Corporate UK Pension Scheme Model shows corporate pension deficit has grown by 19 percent since February this year to £430 billion on an estimated liability of £1.5 trillion.
The corporate pension deficit has been rising steadily since 2008 when it was estimated at only £58 billion. The latest figure is estimated on data available till April 2011 and indicates a rapid growth from February when the deficit was reported at £362 billion.
The short-term interest rate, which is expected to remain low, will continue to aggravate the pension deficit, warned Hugh Creasy – director at Xafinity Corporate Solutions.
“This mark up of nigh on £100bn illustrates two lessons. First, costs can swing by very large amounts over very short periods – in this case, just the second half of April”, said Mr. Creasy.
“Second, it puts into context the Office of National Statistics (ONS) recent news over employer contribution hikes.
“The ONS tell us that employers have paid in around £16bn extra in contributions over the last two years, just one sixth of the interest rate hit”, he added.
The higher number will certainly increase the headache of finance directors as they approach the year-end.
“If there is a silver lining, it must be that employers will now have a greater budget for de-risking exercises”, he said indicating higher investments by companies to hedge against possible shortfalls.
“The greater the reported pension cost, the greater the opportunity to offer members options without causing pain in the company accounts.
“Line this up with the news that deficits are on the march again and we can expect plenty of de-risking activity through 2011”, he concluded.
Explaining the rationale behind companies choosing to stop final salary schemes, Pensions Analyst at Hargreaves Lansdown Laith Khalaf said: “One of the reasons companies have chosen to close down final salary schemes is the volatility of the costs”.
Bond yield volatility can seriously affect a company’s employee benefit schemes he said, adding “market conditions, in particular bond yields, are totally out of their control and yet can have a huge effect on the money employers have to pay into their defined benefit scheme”.