UK pension gap unchanged in 3 years

The gap between how much companies are set to pay out to their employees in pensions and how much they have set aside to pay them has not moved in three years.

New legislation, billions of pounds of additional funding by companies, and a resurgent stock market have all failed to materially affect this 'pensions gap' - which stood at £36 billion in July, according to a new report from the Lane, Clark, and Peacock (LCP) consultancy.

"Despite exceptional stock market returns and record company contributions, the overall pension deficit for the FTSE 100 companies has barely changed from its level of three years ago," said Bob Scott of LCP.

However, while it has remained broadly unchanged from three years ago, there has been movement in since the start of the year.

"In recent months, the aggregate deficit has fluctuated considerably, as equity and bond markets have become more volatile," Mr Scott said.

Changes in the bond and stock markets saw the pension gap rise to a high of £54 billion in January, and then fall to £29 billion in April, before climbing again to its current level.

And it is this market volatility, combined with new accountancy rules, that is driving the deficit.

Rule changes mean that pension funds are required to disclose their current position, and cannot take account of future plans to boost pension funds or rises in the markets.

Additional rules also penalise companies that have large deficits, and force funds to pay more into the government's new pension protection fund - depending on their risk.

All this means that eight companies paid more into their pension funds than to their shareholders, and make it very likely that new entrants will get increasingly worse pension schemes offered to them by employers or have future benefits cut.

Charlie Finch, consultant at LCP said: "Although the new legislation makes it more likely that pension scheme members will receive their promised benefits, the price could be more scheme closures as companies are forced to commit cash to funding their deficits instead of paying benefits for current employees.

"In a number of companies, directors face a difficult choice - how much cash to divert to pension schemes and where should it come from? In the short term, some may divert cash away from investment in the business to the pension scheme." XXX