UK companies 'face £150bn pension gap'

Britain's biggest companies could collectively be facing a pensions black hole of £150bn, a pensions expert warned today.

The figure is three times higher than the £50bn funding shortfall that FTSE 100 companies with final salary pension schemes face under current FRS17 accounting rules.

James Fraser, head of strategy advisor LEK Consulting's financial services practice, said the FRS17 figure failed to take into account how much firms would have to pay if they wanted to buy out their pension schemes.

Once this was factored in, FTSE 100 firms with final salary pensions faced a potential liability of £150bn, he said.

Under a pension scheme buyout, companies pay an insurance firm to take over their pension fund and its liabilities.

Buyout rates tend to be higher than the actual liabilities faced by a scheme because insurance companies use more conservative calculations for life expectancy and investment return, and want to make a profit on running the scheme.

In theory, the buyout value of a scheme is only relevant if a company is winding up its pension, but, in practice, Mr Fraser said the new pensions regulator was basing many of its decisions on a scheme's buyout value.

Mr Fraser stressed that his figure was only an estimate and that it was impossible to put a value on the potential liability.

The research comes at a time when increasing numbers of companies with final salary pensions schemes are closing them to new members.

Rentokil Initial recently announced it was closing its scheme to existing members, while a survey carried out by the National Association of Pension Funds found that one in four companies with a final salary scheme planned to close it to either new or existing members during the coming five years.