FTSE 100 companies are set to spend more on pension promises to former employees than they are on current employees' benefits within the near future, warns KPMG.

The audit, tax and advisory services provider has found in its latest annual pension survey, the Pensions Repayment Monitor, that 22 per cent of FTSE 100 firms have no hope of clearing pension deficits from discretionary cash flow in the foreseeable future. It also reveals that companies are expected to move from a 'normal' 2:1 ratio in defined benefit cash spend for existing employees versus deficit funding (past employers) to 1:1 over the next year, and 1:4 within five years. Projections by KPMG show this huge ratio switch will see £4 of every £5 spent on defined benefit pensions accounted for by past liabilities, not for new benefits.

"It is unprecedented for companies to be spending as much or more on their defined benefit pension benefits for previous employees than for current staff," explained Mike Smedley, pensions partner at KPMG in the UK. "The fact that we are now reaching this point graphically illustrates the increasing unaffordability of defined benefit schemes. Unless companies and their pension scheme trustees can work together to ensure that pension funding can be managed in a way that does not impact on companies' wider financial flexibility, this is likely to result in more companies opting to close defined benefit schemes altogether."

The survey also showed that if back dividends and capital expenditure are added to discretionary cash flow, over 94 per cent of the FTSE 100 would be able to pay their pension deficits in just one year.

"Businesses may now be forced to substantially increase funding. Many trustees, encouraged by the Pensions Regulator, are taking a more cautious view of future returns than the accounting measure. This pressure to add further prudence at a time of economic downturn, and the risk the schemes represent to companies is resulting in companies re-evaluating the validity of defined benefit pensions," added Smedley.

The survey is available here.

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