UK firms could face #150bn pensions liability

The UK's biggest companies could collectively be facing a potential pensions liability of £150 billion (€219 billion).

The figure is three times higher than the £50 billion funding shortfall that FTSE 100 companies with final salary pension schemes face under the global accounting standard FRS17.

James Fraser, head of strategy adviser LEK Consulting's financial services practice, said the FRS17 figure failed to take into account how much firms would have to pay if they wanted to buy out their pension schemes.

He said once this was factored in, FTSE 100 firms with final salary pensions faced a potential liability of £150 billion.

Under a pension scheme buy-out, companies pay an insurance firm to take over their pension fund and its liabilities.

Buy-out rates tend to be higher than the actual liabilities faced by a scheme because insurance companies use more conservative calculations for life expectancy and investment return, and want to make a profit on running the scheme.

In theory, the buy-out value of a scheme is only relevant if a company is winding up its pension, but in practice Mr Fraser said the new pensions regulator was basing many of its decisions on a scheme's buy-out value.

The pensions regulator can force a company to make a contribution to its pension scheme to fund it up to the buy-out value if the company wants to pay a large dividend, take out much larger borrowing, or be taken over and the regulator is not happy that the company's current pension scheme is sufficiently funded. - (PA)