The effects of the Emergency Budget’s austerity measures are likely to deliver a further blow to companies with final salary pension schemes over the next few years, warns Aon Consulting.

The employee benefits and risk management firm said pension deficits have hit £100bn, but worse could be to come in the long-term with the measures eroding the final salary debts of companies if the economy improves.

The aggregate deficit for pension funds shown in company accounts for the 200 largest UK privately sponsored pension schemes increased in May from £88bn to £100bn at the end of June.

The short-term effect is likely to be an increase in deficits, with reduced issuance of gilts relative to previous expectations, combined with slower economic growth, likely to reduce the yields available on gilts and so increase the value placed on final salary liabilities.

“The government’s mantra is that ‘we’re all in this together’, and final salary pension funds are going to share the nation’s pain,” explained Marcus Hurd, head of corporate solutions at Aon Consulting. “A consequence of the tough financial measures introduced in the UK emergency budget is that deficits could increase in the short-term. This will be a bitter pill to swallow to companies who are already piling in billions of pounds to plug these deficits.

“Over the longer-term, however, as the economy recovers, final salary pension funds should be one of the key beneficiaries. The immense importance of gilt yields to pension funds is such that a small change can have a dramatic effect. The economic recovery could be the saviour of the UK private sector pensions debt.”

Hurd added that those companies that can take a long-term view of pensions will see the short-term pain followed up by long-term reward, but warned that this pain could be too much to bear for some companies in difficult times.

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