More than 500 private sector companies in the UK are likely to delay tackling the deficit in their pension scheme, deferring approximately half a billion pounds, new analysis has found.
This comes after The Pension Regulator announced that companies could delay making payments if they face serious economic challenges due to the coronavirus pandemic.
Household names like Arcadia and Debenhams are reported to have sought to defer deficit repair contributions, and analysis by Lane Clark & Peacock (LCP) suggests hundreds more could follow suit.
After surveying more than 100 industry experts, and studying data for over 200 defined benefit (DB) schemes, LCP estimates that 10% of sponsoring employers are likely to delay contributions by at least three months.
The Pension Protection Fund indicated there were 5,436 DB schemes operating in the private sector on 31 March 2019, which suggests that more than 500 could be set to defer payments.
Jill Ampleford, partner at LCP, said: “Some firms that are fundamentally sound are nonetheless facing huge short-term cash flow pressures during the present crisis.
“The ability to agree with trustees a delay in making pension contributions will help them to weather the present storm and continue their support to the scheme in the long term.
“It will be vital to get things back on track once the crisis is over so that a realistic plan is put in place to deal with the shortfall in the pension scheme, particularly as this could have materially increased due to changes in financial markets”.
Firms must also be cutting back on dividends and bonuses and have explored other methods of easing their short-term cash-flow problems before they delay pension deficit payments.
Data from the Office for National Statistics shows that, in a typical quarter, employers pay around £5.5bn into DB schemes. If 10% of schemes delay, LCP said half a billion pounds would be held back.
However, the firm highlighted several reasons why employers may choose not to delay, with some judging that maintaining contributions now will help long-term plans for tackling the deficit.
“Generally, the best way to ensure that member pensions are paid is to ensure that the sponsoring employer stays in business,” said LCP partner Steven Taylor.
“In the short term, this may mean easing cash flow pressures, including agreeing a package of measures with creditors that includes holding back on agreed pension contributions for a short period of time.
“Most employers will not take this step lightly, and will do so only when other avenues have been exhausted.”
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