Trapped surpluses promise Catch 22 for funds with shortfalls

The majority of the FTSE 100 could clear their pension deficits within a year using discretionary cashflow, according to KPMG's Pension Repayment Monitor. But the growing problem of "trapped surpluses" means that, for those companies with the means to repay them, it rarely makes economic sense to do so. And for those companies which do not have adequate discretionary cashflow to make up the shortfall, the risk of damaging the business by diverting funds needed for core commercial activities usually outweighs the benefits of boosting the pension fund. Mike Smedley, a partner in the pensions team at KPMG in the UK, said: "Although it seems counter-intuitive, using cash to top up a pension fund makes no sense in almost all circumstances. For companies with healthy cashflows and relatively small deficits, the chances are that their cash will end up locked away in a trapped surplus."

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