Outgoing pension minister Ros Altmann claims Britain’s final salary pensions will stack up even worse deficits because the government has ducked important decisions that could have resolved the problem.
In a bitter rant against her former cabinet colleagues in David Cameron’s government, she accused politicians of failing to make difficult decisions that may have damaged their political careers.
She also warned in her tirade that companies have taken poor investment advice and should ditch traditionally safe investments such as government bonds in favour of more volatile stocks and shares.
Altmann pinpointed workplace final salary schemes as a drag on company finances.
The UK has around 6,000 defined benefit schemes. About 4,800 have deficits, which means they have to pay out more than they have in assets.
Billions shovelled into funds
She considers at least 1,000 employers are struggling with insolvency trying to maintain their businesses while funding their pension schemes.
Collectively, the schemes are underfunded to a tune of billions of pounds.
Defined benefit schemes pay workers a guaranteed income for life based on the length of time they work for an employer and the contributions paid into the scheme.
In recent years, most companies have switched to pensions based on stock market performance that are cheaper to fund.
“It’s a vicious circle. Companies have shovelled billions into these funds in attempts to stop the deficit, which is stopping them from growing their business”, she said.
“Firms could have to turn to riskier investment choices such as shares if they are to run a surplus.”
Firms struggling to stay solvent
FTSE100 companies have huge final salary pension deficits to find.
Some, like BT, complain cash that should go into growing the business is diverted to the pension scheme. Others are trying to switch the liability to the government’s Pension Protection Fund to make their businesses more attractive to buyers.
“Those struggling to keep their pension funds solvent are being told to invest in government bonds, which are seen as the least risky investment option,” she said.
“However, returns on these are practically non-existent due to a combination of low interest rates and high demand.”
The Department of Work and Pensions has not responded to Altmann’s comments.