Warning over pensions 'black hole'

Retirement plan funding for FTSE 100 companies showed a deficit of £41 billion in mid July compared to a £12 billion surplus a year earlier, according to figures from consultancy firm Lane Clark & Peacock (LCP).

Leading pension experts said the re-emergence of a sizeable black hole marked a nail in the coffin for generous schemes and predicted the end of final salary pensions in the private sector.

LCP's 2008 Accounting for Pensions report puts the swing into the red down to a combination of equity market volatility, rises in expected inflation and the credit crunch.

As a result, funding levels have seen their largest slump since the introduction of modern accounting methods in 2002.

Bob Scott, partner at LCP, said: "UK pension schemes of FTSE 100 companies enjoyed a brief period of surplus until early in 2008. Some companies chose to spend their surpluses on various forms of de-risking activity including buy-out, purchasing financial swaps and reducing their exposure to equities.

"Events of the last year demonstrate the importance of assessing and managing pension risks and being prepared to take opportunities when they present themselves."

Research shows that at a time when British businesses are feeling the pinch, contributions to schemes have fallen from £13.4 billion to £13.1 billion over the year.

Separate figures released by consultancy firm Mercer found that for FTSE 350 companies, the pensions deficit stood at £47 billion at the end of June compared to a £14 billion surplus in March.

Ros Altmann, pensions consultant and former Downing Street advisor, said the growing black hole would result in companies shutting more generous final salary schemes. She said: "It is inevitable that employers will keep on closing schemes to both new and existing members, especially in the face of so much uncertainty around funding and costs. This is the final chapter. Final salary pensions promise will soon be a thing of the past for private sector workers."