Profits 'under threat' as companies try to plug £160bn pensions gap

Companies will have to plug a £160bn deficit in their pension schemes over the next 10 years, causing serious damage to profits and hampering the pace of economic recovery, according to a new report published by the Confederation of British Industry today.

The report estimates the accumulated deficit in company schemes in the UK to be in the region of £160bn, although it admits that it could be as high as £300bn. The combined deficit in the FTSE 100 alone is estimated at £100bn.

Companies have about 10 years to address this black hole, and will have to invest an extra £8bn into their pension schemes this year. This will rise to an additional £12bn needed in 2004 and £16bn in 2005. This would mean total annual contributions to pension schemes from companies would have doubled in four years to £43bn in 2005.

The requirements will be bad news for the Government, which will lose out on up to £2bn in taxes as companies move to shore up their pension schemes, which have been damaged by falling equity values. Company pension contributions are tax deductible and the Government's corporation tax revenues will be in shortfall.

The CBI has measured the effect of these additional contributions on the ability for companies to invest in growing their businesses. It says corporate investment will fall by 2.2 per cent this year and will grow at an average of 2.1 per cent in 2004 and 2005. This compares with rises in investment of more than 10 per cent after the recession in the early 1990s. The Treasury said in the 2003 Budget that it expects corporate investment rates of between 4 and 6 per cent.

Ian McCafferty, chief economic adviser at the CBI, said: "It is quite clearly the case that employers will have to pay more contributions to their pension schemes going forward. Although these contributions will be absorbable by companies, and firms may benefit from rises in asset values that reduce the deficits, the economy will suffer. And the effects will rebound on the Government through lower tax receipts."

Mr McCafferty said the increased pension provisions will hit profit growth and squeeze the cash flows available for corporate investment and dividends. It will also restrict the speed at which the economy can recover.