Pension deficits at record high as contributions threaten to choke business

Employer pension schemes are being driven into the red by the Bank of England’s loose monetary policy, requiring firms to pile ever more cash into their funds.

The number of companies facing pension deficits - meaning the assets in their schemes will be insufficient to meet the pensions that are to be paid out - rose to a fresh high of 5,175 in January, according to data compiled by the Pension Protection Fund (PPF).

The aggregate balance of those schemes took a further dive, falling to a deficit of £367.5bn, compared with just £46.4bn a year earlier.

Economists have said that the rising number of deficits is an unintended consequence of the Bank’s low interest rates and quantitative easing, which have pushed down bond yields.

Regulation linking bonds and pensions means that as yields drop, total pension liabilities rise in turn. Companies must then find the cash to meet their rising pension liabilities, in the hopes that they will then have large enough pots to cover the payouts they are due to make.

“Over the month of January, liabilities rose by 9.2pc, reflecting decreases in nominal and index-linked gilt yields,” the PPF said.

The Bank of England in 2013 said that some companies have reported that “pensions deficits were having an impact on their investment decisions and on mergers and acquisitions activity”.

On Tuesday Michael Saunders, an economist at Citi, said that the issues highlighted by a Bank survey in 2013 "may emerge again with this renewed escalation in pension deficits".

Pension consultants JLT Employee Benefits warned last July that six FTSE 100 companies had pension liabilities now larger than their equity market value.

The list included supermarket J Sainsbury, as well as International Airlines Group, the owner of British Airways, BAE Systems, RSA, Royal Bank of Scotland, and BT.

While expansionary monetary policy has been intended to stimulate the economy, for some companies the effect of pensions regulation may be making things harder.

In its 2013 report, the Bank of England said: "Companies with a defined benefit scheme in deficit are required to submit a recovery plan to The Pensions Regulator, which expects a deficit to be eliminated as quickly as the employer can reasonably afford."

Mark Duke, a senior consultant at Towers Watson, said: "Companies have been paying tens of billions of pounds into their pension schemes each year, but that has not been enough to stop deficits from getting bigger."

The Bank survey of firms during April and May 2013 found that “around half of firms surveyed reported a somewhat negative impact from deficits on their investment spending”.

While a shift from investment spending by firms to investment by pension funds may not reduce the level of investment in the economy, it may reduce its effectiveness.

Eamonn Butler, director of the Adam Smith Institute, said: "Regulation of pension funds has meant that their decisions are often nothing to do with finding returns, but instead driven by an overbearing system of rules and red tape."

The Bank's 2013 report continued: "A sizable proportion of firms reported a negative effect on dividends and pay." The size of their deficits could also reduce company's appetites for credit, as borrowing could increase levies owed to the PPF.