FTSE companies have been delivered more gloomy news over their pension schemes with a warning from Aon Consulting that drastic action is necessary to pull defined benefit (DB) schemes out of the deficit black hole.

With the aggregate pension fund deficit in company accounts for the 200 largest UK privately sponsored pension schemes rocketing to £88bn in November, a £10bn increase over November, Aon said only drastic action will suffice: to reduce the deficit to zero over the next seven years, investment returns of 11 per cent per annum would be necessary. This is equivalent to the FTSE 100 hitting 9000, or company contributions of £15bn per year.

The deficit could be recovered by a combination of these approaches, said Aon, but many schemes will instead be looking to reduce member benefits.

Aon predicts that the market falls over the last two years will force firms to consider the future of their schemes, considering closure or providing lower pensions altogether. The Pensions Regulator's (TPR) recent push for greater scheme funding has also increased contribution requirements for companies, putting even more pressure on these schemes.

Solvency II is also an impending issue, due for implementation in 2012, which is likely to increase the cost of annuity purchase, and the UK Accounting Standards Board's (ASB) proposal that risk-free discount rates be used when looking at the pensions deficit on a company balance sheet is also likely to discourage DB provision.

Marcus Hurd, head of corporate solutions at Aon Consulting, said: "As things stand, the inescapable reality is that pension deficits are here to stay until the final salary scheme is passed across to an insurance company and employers will have to think carefully about how to handle the situation.

"There is no quick fix imminent in financial markets and the size of the challenge for UK companies is immense."

Hurd added that there is no easy way of clearing a scheme deficit, and Aon expects to see more and more companies moving away from DB and looking at lower risk defined contribution (DC) plans instead.

Share Story: