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Pension costs could mean firms go bust

Rising pension costs and a tough economy could lead to a increased number of companies being forced into receivership and administration, warns consultancy KPMG.

It says regulatory requirements such as FRS17 and the minimum funding requirement, which are being blamed for the current pension problems, are merely bringing to light the existing deficits that many companies are facing.

Companies which are most in danger are those which have recently made large numbers of employees redundant, leaving only a small number of members to fund a scheme which is supporting a big number of pensioners.

As a result, firms that are looking to cut costs through redundancies may not have this avenue open to them because of their pension fund liabilities.

KMPG says that the cost of laying off a 55-year-old employee with 25 years&#39 service and earning £12,000 a year could be as much as £50,000 to the pension fund.

A recent KPMG survey found that pensions are now costing business an average of 15 per cent or more of the payroll.

This has led to many companies closing down their final-salary schemes and moving to money-purchase but even then their historic liabilities remain.

The change resulting from FRS17 is only adding more pressure in that it is forcing pension funds to account for any surplus or deficit directly on its balance sheet.

Corporate recovery practice partner Jim Tucker says: “We are going to see an increasing number of situations where a company would like to cut its staff costs as part of a restructuring but is unable to afford the resulting pension costs – a classic Catch 22.”

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