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 they are on current employees’ benefits.
The accountancy firm found that many companies are re-evaluating the validity of supporting defined benefit pensions and are likely to find DB provision is no longer feasible.
Between the end of 2007 and end of 2008, FTSE 100 deficits doubled from £20bn to £40bn. KPMG estimates that at the end of June 2009, the aggregate deficit could be around £80bn.
KPMG projects that within five years, £4 of every £5 spent on DB pensions will be for past liabilities and not 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 graphically illustrates the increasing unaffordability of defined benefit schemes. Unless companies and their pension scheme trustees can work together to ensure that pension funding can be managed in a way that does not impact on companies’ wider financial flexibility, this is likely to result in more and more companies opting to close defined benefit schemes altogether.”