Two thirds of companies expect to reduce pension contributions next year

4bn deterioration during August for 200 largest UK final salary pension schemes, with deficits now standing at 25 billion

Proportion of schemes in deficit over the last month increased from 69% to 71%

Two thirds (67%) of UK companies are planning to contribute less towards final salary pension scheme deficits next year as many had expected to have reduced deficits this year, according to figures out today from Aon Consulting, a leading pension, benefits and HR consulting firm. However, difficult market conditions are continuing to increase the deficits faced by these schemes over the past year with deficits standing at 25 billion in the Aon200 index for August and 71% of pension schemes in the red.

The main causes in the deterioration of pension scheme deficits over the year are inflation rising from 3.35% to 3.9% (40bn loss) and equity market falls of near 8% (25bn loss), which has been partially offset by corporate bond yields rising from 5.75% to 6.5% (50bn gain).

Many companies disclose their current year pension contribution and their estimated contribution for the following year in their annual company accounts. The latest figures reveal that two thirds of companies have planned for their final salary pension contributions to decrease next year. Employers have been paying large contributions to deal with deficits, but given the deterioration of pension scheme deficits over the past year, they will be in for a shock at their next actuarial valuation if they think they have already done enough to pay off their deficits.

Commenting on the latest figures, Marcus Hurd, senior consultant and actuary at Aon Consulting, said: ìThe threat of an impending recession is causing companies to haul in discretionary spends. Whilst there is an increasing pressure on companies to contribute more into final salary pension schemes to clear deficits, the harsh realities of the economic climate appear to be setting in.

ìPension schemes are long term investments and companies are increasingly looking towards longer term solutions. Non-cash security is on the company agenda in an attempt to stave off short-term liquidity pressures.

ìGiven that 71% of pension schemes are in deficit at the current time, the apparent intent to reduce contributions may seem alarming, but cash is not the only solution to pension scheme funding. Alternative forms of security, such as group company guarantees, can play a significant role to ease the liquidity burdens of UK plc.î

The Aon200 Index, which tracks the surplus (or deficit) of the 200 largest UK privately-sponsored pension final salary schemes, shows a 4 billion deterioration over the past month with deficits now standing at 25 billion (compared to 21 billion in June), which is an 15 billion increase in deficits compared with figures this time last year.