Corporate pensions for the largest companies in the UK face doubling costs in the next three years, according to consultant firm JLT Employee Benefits.
Current annual costs for FTSE 100 company pension funds are roughly £7 billion ($9 billion), JLT said, but this could double to £14 billion by 2019 as plan sponsors struggle to fill widening deficits.
The total deficit for FTSE 100 pensions was estimated at £87 billion at the end of March this year, the consultant said. In addition, 16 companies disclosed liabilities of more than £10 billion.
Costs to employers have already doubled during the last three-year actuarial valuation cycle, from 26% of total employment costs to 52%, JLT said. “Companies that are due to have an actuarial valuation in 2016-17 are particularly at risk of facing demands in the near future for increased contributions to cover higher employee service costs and higher deficits,” the consultant added.
These spiralling costs are likely to lead to defined benefit (DB) funds closing to all employees if not addressed, JLT said.
Charles Cowling, director at JLT Employee Benefits, said it was “difficult to conceive” that higher costs would not lead to “drastic action… particularly as large pension deficits can have a detrimental impact on the company’s financial health and, therefore, its share price and dividend payments.”
“If a company is in a really bad shape, a large pension deficit could tip it into insolvency,” Cowling added. “We therefore expect employers to be reviewing any remaining ongoing DB pension provision and monitoring their DB pension deficits very closely.”
UK funds have been hit hard by the fallout from the EU referendum in June. Plummeting government bond yields and the Bank of England’s decision to cut the base interest rate to 0.25% have pushed up liabilities and sent aggregate deficits to record levels.