12 August 2008

The country is heading for a ‘Pensions Crunch’ as over cautious trustees are stripping FTSE 100 companies of much needed cash, warns consultant KPMG.

The 2008 KPMG Pensions Repayment Monitor has shown that FTSE 100 companies’ ability to use discretionary cash flow to pay off pension deficits improved in 2007, and despite recent market turbulence, they are now in a better position to do so than they were at the end of 2006.

According to the Monitor, it is possible that around six in ten FTSE 100 companies are paying too much into their pension schemes, with up to half overpaying by more than £20m a year. This is irrespective of the credit crunch adding £20bn to the accounting deficits of these companies during the first half of this year.

Commenting on the findings, KPMG’s pensions partner Mike Smedley said that pension scheme trustees were getting nervous and demanding more money from their sponsoring employer in light of the credit crunch and revised thinking on mortality. However, companies are being advised that pouring money into the pension scheme might not be the best use of this cash at the moment.

“It’s all a question of timing,” said Smedley. “At a time when cash is plentiful, using it to clear debt can be a very good idea.” However, it is important to remember that as the credit squeeze tightens, financial obligations need to be prioritised and if pension liabilities can be paid off over a longer time frame it might be the best interests to devote funding to ensuring the company’s long-term health.

- Pensions Age August 2008