The UK could be facing a £689bn pensions black-hole by the end of 2009 if companies do not wake up to their current position, warns Xafinity Corporate Solutions.

The firm's latest interactive model, Corporate UK Pensions Scheme, covers 93 per cent of the UK's Pension Protection Fund (PPF) eligible defined benefit (DB) schemes, and 12.4 million members.

Pat Wynne, corporate solutions director at Xafinity, told Pensions Age that the company used sample data from the PPF and the Pensions Regulator's (TPR) Purple Book. Wynne is concerned about the 2.5 per cent difference between gilts and corporate bond yields: "We are worried that companies might be lulled into a false sense of security." He said this yield would fall below 4.75 per cent if corporate bond spreads revert to their historic norms.

He also said Xafinity Corporate Solutions is concerned that too much data focuses on the FTSE, and does not necessarily represent a cross-section of UK pension funds.

Wynne commented: "I know from speaking to TPR that it wants to support the pensions industry," but admitted that their guidelines sometimes make this difficult. "Once [the deficit] goes up, members are never going to be able to pay it." He said there is the possibility of company investment to pay the deficit off, but the period over which this is permitted to occur is important. "If deficits do go up, as we think they will, and there is no movement, we can see worrying scenarios for the whole economy, not just for pensions."

He concluded: "Whilst the model is currently unlikely to give any good news to schemes, it can help company executives and finance professionals plan their own scheme future, whether it's ongoing funding, FRS17 or buy-outs.

"These are by no means 'worst case' scenarios as our analysis of the average longevity assumptions underpinning the Purple Book figures suggest that further improvements in longevity will need to be built into future valuations. Indeed, using a 'best estimate' from our longevity experts, coupled with the lower quartile assumption on equity performance over the year, the gearing effect of these changes creates a staggering deficit in excess of £1,000 billion."

The Corporate Solutions model is available here.

- Pensions Age June 2009

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