Pensions deficits at the UK’s largest businesses have fallen by almost 25% since the start of the year, but experts warn that it could take more than 15 years for the shortfalls to be cleared.
The total deficit for the final salary pension plans of FTSE 100 companies is now £100bn, down from £130bn in January, according to research from consultancy Deloitte. But despite the inroads made it predicts that, at the current rate of company contributions, the pensions shortfall will still not be clear in 2020.
Companies should look to eliminate deficits in one go instead, by borrowing money and paying the proceeds into the pension plan, advised David Robbins, consulting partner at Deloitte.
“Companies can receive near-immediate tax relief on pension plan contributions,” he said. “Paying the deficit off over 15 years or more means the tax benefit would only be achieved over that period, whereas borrowing money to fund the whole deficit accelerates the tax break.”
Companies that immediately clear their deficits could also gain from a reduction in their levy to the government’s new Pension Protection Fund.
This levy could amount to more than £10m a year for some of the UK’s largest companies. From April 2006, the levy will partly depend on how well funded the pension plan is – the deeper the deficit, the larger the levy.
“The decision to eliminate a deficit by borrowing depends on the company being able to obtain competitive interest rates, which often depends on the extent and security of existing loans,” Robbins said. “However, right now, there are a number of banks that are willing to support company finances.”
What can HR do to solve the UK’s pensions crisis? Look out for a new article next week featuring top tips at www.personneltoday.com/indepth