Pension deficits 'spell end' for generous schemes

The UK's largest pension schemes have plunged deep into the red as a result of the credit crunch and market volatility, a report today indicated.

Retirement plan funding for FTSE 100 companies showed a deficit of £41bn in mid-July compared to a £12bn surplus a year earlier, according to figures from consultancy firm Lane Clark & Peacock (LCP).

Leading pension experts said the re-emergence of a sizeable black hole marked a nail in the coffin for generous schemes and predicted the end of final salary pensions in the private sector.

LCP's 2008 Accounting for Pensions report puts the swing into the red down to a combination of equity market volatility, rises in expected inflation and the credit crunch.

As a result, funding levels have seen their largest slump since the introduction of modern accounting methods in 2002.

Bob Scott, partner at LCP, said: "UK pension schemes of FTSE 100 companies enjoyed a brief period of surplus until early in 2008.

"Some companies chose to spend their surpluses on various forms of de-risking activity including buy-out, purchasing financial swaps and reducing their exposure to equities.

"Events of the last year demonstrate the importance of assessing and managing pension risks and being prepared to take opportunities when they present themselves."

Research shows that at a time when British businesses are feeling the pinch, contributions to schemes have fallen, from £13.4bn to £13.1bn over the year.

Separate figures released yesterday by consultancy firm Mercer found that for FTSE 350 companies, the pensions deficit stood at £47bn at the end of June compared to a £14bn surplus in March.

Ros Altmann, pensions consultant and former Downing Street advisor, said the growing black hole would result in companies shutting more generous final salary schemes.

She said: "It is inevitable that employers will keep on closing schemes to both new and existing members, especially in the face of so much uncertainty around funding and costs.

"This is the final chapter. Final salary pensions promise will soon be a thing of the past for private sector workers.

"Public employees will become the pension elite for a while, but cost pressures will burden future taxpayers too much and, in years to come, we as a nation will face greater problems with funding public sector pensions than the private sector is struggling with to fund its historic pension promises now."