Pension deficit now equals 70% of UK companies’ entire annual profits fuelling retirement fears

The gap between the expected returns of FTSE 350 companies’ pension funds and the amount they are projected to pay out jumped by £12bn to £62bn in 2016 (PA)

The huge deficit in the pension funds of the UK’s biggest listed firms rocketed last year, adding to concerns over how companies’ schemes will fund workers’ retirement incomes.

The gap between the expected returns of FTSE 350 companies’ pension funds and the amount they are projected to pay out jumped by £12bn to £62bn in 2016, according to new research by actuaries Barnett Waddingham.

The yawning gap is equivalent to 70 per cent of the entire annual profits of those firms last year - up drastically from around 25 per cent in 2011, the research found.

Last year’s shortfall “is now even higher than it was in the immediate aftermath of the financial crisis”, the report said.

A 0.7 per cent fall in government bond yields would mean the projected deficit eclipses companies’ annual earnings in 2017, Barnett Waddingham calculated.

Projected deficits have widened as returns on investments such as government bonds have remained low as central bank interest rates remain close to zero. Steady increases in life expectancy have also increased the amount that pension schemes are expected to pay out.

Government bonds have traditionally made up a significant percentage of pension fund investments as they are seen as a low-risk asset. Barnett Waddingham emphasised that the gap could easily narrow if interest rates rise and returns increase to closer to normal levels.

It also said that new evidence suggested that almost a decade of austerity in the UK had stalled the upward rise in life expectancy which developed countries have experienced over the past century.

This fact which would provide “welcome respite” for company pension schemes, struggling to meet payouts. Men are now expected to live until 79 and women until the age of 83.

Nick Griggs of Barnett Waddingham said: “Comparing the pension deficit to profits is a simplification, but it helps to put the scale of the challenge into context. Unless companies are profitable over the long term, they can’t generate enough cash to meet their liabilities, including the pension deficit.”

He added: “The deficit is essentially the difference between two much bigger numbers, and a few gentle economic triggers could completely change the picture.

“This is why many companies are not rushing to clear deficits quickly with additional cash contributions.”