Britain's corporate stars face pension time bomb

A report out today reveals that British businesses are buckling under their liabilities

Under-funded pension schemes could cripple several of Britain's biggest companies and wreck pros-pects for economic recovery, a report today warns.

An analysis by accountancy firm PricewaterhouseCoopers reveals that companies' ability to support their huge pension liabilities remains mired at levels far below where they were before the recession.

It comes just days after a charity, People Can, which supports the homeless, victims of domestic abuse and ex-offenders, went bust as a result of crippling pension liabilities. That prompted fears that others are poised to follow.

Although Britain's big companies aren't yet at that stage PwC – coincidentally the administrator to People Can – said a combination of low interest rates and investment returns together with high inflation means deficits won't improve without action from companies and trustees.

It warns that companies may have to inject substantial funds into their pensions, diverting them away from desperately needed business investment as the economy flatlines.

PwC's Pensions Support Index, which tracks the overall level of support provided to private sector defined benefit – or final salary – pension schemes now stands at 74 out of a possible 100. The Index had shown a steady improvement since its March 2009 low of 64, with the financial crisis still raging.

But since the start of the year the number has been stalled at 74 and shows no signs of further improvement leaving it far below the 88 level achieved in early 2007.

The figures could call into question the Department for Work & Pensions' ambition to create a new kind of pension called the "Defined Ambition" pension scheme, which would offer employees some level of guaranteed income in retirement.

With firms – which have now mostly forced staff to accept schemes where they bear the investment risk (known as "money purchase") – grappling with huge liabilities they are unlikely to risk taking part in such an experiment.

Jonathon Land, pensions credit advisory partner at PwC, said: "We are no longer in a standard economic cycle. We are living in a world of low interest rates and investment returns and relatively high inflation, meaning that without action, pension scheme liabilities are likely to remain at their present high levels.

"If investment returns remain low, and company earnings do not rise in line with inflation, companies will find they are paying a greater share of those profits towards covering their pension deficit.

"This will only add further pressure on those companies which are already weak."

Companies are forced to publish details of their pension deficits along with their report and accounts.

But pensions experts say these disclosures may be understating the true level of pension funding black holes.

The Pension Protection Scheme, set up to protect members of schemes when employers go bust, refuses to publish its data on how much it would cost to buy out and rescue company pension schemes. It cited "commercial confidentiality".

However, its numbers are thought to show that many companies' funding "black holes" are far greater than disclosed in accounts.

PwC's Pensions Support Index tracks the relationship between the financial strength of FTSE 350 companies and their pension obligations, indicating the overall level of employer support offered to defined benefit pension schemes.