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UK companies may need to 'step up' deficit contributions

UK companies included in the FTSE 350 index paid £8bn (€9.6bn) into their defined benefit (DB) pension schemes in 2015 to reduce deficits, a similar amount to that paid in each of the last three years but markedly lower than the level seen in the post-financial crisis years, according to new research.

Consultancy Barnett Waddingham said it conducted research that showed the aggregate level of deficit-plugging contributions by the country’s top 350 companies was still well below the £12bn per annum paid in 2009, 2010 and 2011.

It questioned how long sponsoring companies would be able to continue with this lower level of contribution given the extreme uncertainty following the EU referendum and falling Gilt yields.

Nick Griggs, Barnett Waddingham’s head of corporate consulting, said: “Over the last three years, aggregate deficit contributions paid by FTSE 350 companies have remained stable. 

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“However, given the movements in financial markets over the last six months and the implications of Brexit, it seems likely we will see a move back to the contribution levels required post financial crisis.”

Griggs said the future funding needed to meet DB pension obligations was another unwelcome area of uncertainty magnified by the vote to leave the EU.

In the 2015 research, the firm said projected pension payments from DB obligations remained stable, with more than £1.4trn expected to be paid over the next 60-plus years to former staff.

It said the £630bn in assets held to meet these obligations had performed well in absolute and real terms over the last few years. 

“However,” it warned, “falling Gilt yields means future investment returns on these assets are assumed to be considerably lower, and, consequently, companies are going to have make up the gap.”

Over the last three years, fewer companies have made very large one-off contributions to their DB schemes, according to the research, with just two companies making contributions of more than £500m in 2015 compared with eight in 2009.

“FTSE 350 companies play an important part in supporting their former employees in their retirement with payments of more than £20bn being made to pensioners in 2015,” Griggs said, adding that this was a significant amount compared with the sum of around £90bn paid by the government in state pensions.

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