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DB deficit at tipping point

Nearly a quarter of FTSE 100 firms will be unable to pay off their pension deficits over any reasonable time period, according to KPMG research.

In its fourth annual Pensions Repayment Monitor, KPMG says FTSE 100 companies have reached “a tipping point” because, for the first time, they are likely to spend as much on paying the pension promises to past employees as on current employees’ benefits.

The accountancy firm found many companies are re-evaluating the validity of supporting defined-benefit pensions and are likely to find DB provision is no longer feasible.

Over the course of 2008, FTSE 100 deficits doubled from £20bn to £40bn. KPMG estimates that by the end of June 2009, the aggregate deficit could be around £80bn.

KPMG predicts that within five years, £4 of every £5 spent on DB pensions will be for past liabilities as opposed to new benefits. KPMG UK pensions partner Mike Smedley says: “It is unprecedented for companies to be spending as much or more on their defined benefit pension benefits for previous employees than for current staff. “The fact that we are now reaching this point illustrates the increasing unaffordability of defined-benefit schemes.

“Unless companies and their pension scheme trustees can work together to ensure pension funding can be managed in a way that does not have an impact on companies’ wider financial flexibility, this is likely to result in more and more companies opting to close defined-benefit schemes altogether.”

Richard Jacobs Pensions and Trustee Services director Richard Jacobs says: “Month after month, these companies are restating the fact they are in deficit. These schemes are a noose around their neck. They are not going to be able to develop, expand or sell themselves to other companies.”

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