Quantitative easing has driven final salary pension scheme deficits to record levels, pounding balance sheets and absorbing funds that firms could invest in staff, equipment, facilities and product development.
Since March, quantitative easing has produced a glut of investment into bonds, reducing their yield. Because equity markets and property funds have also plummeted, many pension schemes have increased their investment in bonds, pushing them further into the red. Government figures show that defined benefit pension schemes were £53.4bn in surplus last year, but now, 7,400 of the largest private sector schemes are £242bn in deficit.
This could spark a vicious circle whereby shares fall further, pension liabilities grow and trustees demand more money up front. Firms may then cut business investment and performance, forcing shares even lower, according to the Confederation of British Industry (CBI). "An overreaction to deficits could be a factor in sending some firms under," said CBI senior policy advisor Jim Bligh.
His comments come after Associated British Foods (ABF) revealed its debt had ballooned, partly as a result of a decline in the value of the group's pension assets. It recorded a surplus in its defined benefit pension scheme last September of £85M, which is now a deficit of £274M. "Net debt for the group was £295M higher than the last half year at £1.14bn and £352M higher than last year end ... Net assets were significantly impacted by a decline in the value of the group's net pension assets," said George Weston, chief executive of ABF.
Tesco announced last week that its pension deficit had grown from £600M to £1.1bn in the last year.