Covering pension deficits will impact business investment, feel experts

Covering pension deficits will impact business investment, feel experts

	Published : Sat, 21 Jan 2006 16:10 By : Richard Owen Print this Story

LONDON: British companies, fearing penal action against their mounting pension deficits, are hurrying up with plans to cover the shortfall, but in doing so, they tend to harm their own business, profit and shareholders interests, feel some top-rung financial analysts.

Conservative estimates put the collective pension funds deficit as much as 150 billion pounds and an effort to cover up this gap would mean the companies will have little funds for investing in order to improve their profitability and provide returns to investors, say these analysts.

While any move on the part of the corporate entities to meet the pension shortfall is appreciable, there is an underlying risk that precious funds that are normally available for investments are getting used to make the pension funds healthier. But, when the businesses themselves become weaker, the pension funds are at a higher risk, these analysts aver.

Several companies in the country have pumped in money to reduce the deficit and attempted to rationalise the pension schemes, like giving up the final-salary based schemes and closing pension schemes to new employees. But, the changes in accounting procedures have affected the pension funds too, and most of the companies find it urgent to handle the deficit as the government is set to bring pensions under regulatory control. The accounting rules under FRS17 are estimated to have increased the pension deficit by 10 billion pounds. And the government has set up the Pension Protection Fund, which is expected to impose a levy on companies.

Many large companies have taken pre-emptive measures in view of the increasing costs on managing pension funds, the new accounting rules and the setting up of the regulator. Some have closed down pension schemes altogether, some have made the schemes unavailable for new entrants, while some have stopped the final salary-based scheme and instead opted for career average-based schemes. Many of these companies have contributed substantial amounts from their internal accruals to cover up the deficits.

Some economists are of the opinion that this scenario is detrimental to the growth of businesses. They point out that according to official estimates the investment growth in businesses in the country in the third quarter of 2005 has been a mere 0.3 per cent and it is not likely to go up considerably in the near future.

Some actuaries and senior consultants feel that reducing interest rates and improving longevity are just two of the several factors that have led to the pension deficits. They point out to the extra costs imposed by the government on private sector final salary-based schemes. This has resulted in an additional burden on the companies.

Then, there are the levies charged by the Pension Protection Fund on private sector pension funds. While these levies are expected to bring in 575 million pounds to the PPF's coffer, the amount has to come from the pension funds. Though the levies may in effect increase the value of pensions in the long run, the claims as of now are mostly from firms that are in financial doldrums. Analysts believe it is an extra cost, which do not bring in significant value in the short run.