Pension shortfalls may fuel the crisis

Jan 19 2009 by Peter McCusker, The Journal

THE UK’s biggest employers’ group today warned that the Government, investors and trustees could over-react to growing pensions deficits caused by the downturn, hitting the UK’s economic recovery.

The CBI said falling share prices had plunged defined benefit final salary pension schemes £194bn into the red, less than a year aft er they were £53bn in surplus.

The huge deficits were starting to play on investors’ minds, said the CBI, warning that trustees could ask for more money up front from firms trying to weather the recession, cutting investment and depressing shares.

Firms would than have less money to help survive the downturn, sparking a vicious circle of falling shares and growing pension liabilities.

John Cridland, deputy director general of the CBI, said: “Longer lives and complex rules have made final salary pensions very expensive at the best of times. Many firms are committed to keeping their schemes running, but that becomes especially challenging during a recession.

“An over-reaction to deficits could be a factor in sending some firms under, and leave the rest struggling for capital at a time when they need it most. We urge investors and trustees not to feed the fire. They should step back from spot valuations, and recognise that the deficits are a snapshot that does not reflect the full picture.”