Pensions in crisis as black holes deepen

THE bosses of Britain’s biggest companies are more interested in lining shareholders’ pockets than plugging the black holes in their pensions, a study shows.

The report by actuary Lane Clark & Peacock revealed that 56 companies in the blue-chip FTSE100 index disclosed pension deficits worth a combined £42.3bn at the end of 2015.

But those business handed out dividends of £53bn during the course of the year – cash which could have been used to plug the gaps.

In total, LCP estimated Footsie firms had deficits of £46bn as of July 31. This was up from £25bn a year earlier. The shortfall highlights a growing crisis for workers with gold-plated defined benefit pension funds.

It has been thrown into focus by the woes of collapsed retailer BHS, which has a £571m deficit that billionaire former owner Sir Philip Green is under pressure to fill. However, the schemes have been facing a slow-burning problem for years as their liabilities ballooned.

They tend to be heavily invested in gilts – and these have suffered vanishing returns since the financial crisis, making it harder than ever to increase the amount of money in pension pots.

At the same time pensioners are living longer, meaning there is an ever-greater pressure on the funds available.

The pension report was written by LCP senior partner Bob Scott.

He said: ‘It’s not been a happy time for pension funds for the last 12 months.

‘One solution for the Government and the regulator would be to get tough with companies and tell them to put even more money into their schemes and get them funded over a shorter period. But that could be counterproductive – if money gets diverted into pension funds, that’s money that’s not being invested in the business.’ Scott’s solution is a controversial change to the rules, giving pension funds the freedom to change the rules if necessary.

Pension payments are linked to inflation, and many rise in line with the Retail Price Index.

But Scott would like to see trustees given the freedom to switch to using the lower Consumer Price Index. He said some funds had already made the switch but others were prevented from doing so because of their small print.

‘The Government should end the uncertainty – the legal lottery – by allowing companies to move from RPI to CPI, subject to safeguards,’ Scott said.

‘The safeguards are important as they should not automatically allow a profitable company with a large pension surplus to increase that surplus by reducing benefits.’ This would cut Footsie pension liabilities by up to £30bn, he said, giving breathing space to many schemes. But the proposal would likely be fiercely contested by pensioners themselves as their earnings could drop.

Independent consultant John Ralfe said: ‘The proposal is wrong in principle and is unworkable in practice. It is a half-baked idea, pushed by pension lobbyists with a vested interest in allowing companies to break their pension promises.

‘Why should pension scheme members take a haircut whilst nothing changes for shareholders and lending banks?’

MPs on the Work and Pensions Select Committee have launched an inquiry into direct benefit pension schemes, expanding on an investigation of BHS.

Chairman Frank Field, Labour MP for Birkenhead, said: ‘There’s a crisis approaching over schemes with huge and growing deficits. One of our tasks will be to look at how we negotiate the next 30 years.’