Companies are taking up to four years longer than expected to meet their pension shortfalls despite diverting more cash into their schemes, compromising their ability to invest in future growth, according to research by PwC.
PwC's survey of 150 UK defined benefit pension schemes reveals that on average it will take companies 11 years to repay their pension deficits due to deteriorating funding positions.
Nearly two thirds (63%) of schemes have extended the time it will take to reach full funding by three years or more in order to deal with an increased deficit. This means it will take many companies with defined benefit pension schemes until 2024 to pay off the deficits, whereas many were originally targeting getting back into balance by 2020.
Only 14% of respondents with valuations in 2012 or 2013 have an unchanged or shorter period to reach full funding than at their last valuation. Meanwhile over two thirds (69%) of pension schemes have increased their contributions since their last valuation.
Paul Kitson, partner in PwC's pensions advisory team, said: 'Despite early signs of economic recovery, companies are still ploughing considerable amounts of cash into their pension scheme just to manage the deficit. This means money that could be reinvested in the business to promote growth, jobs or the strength of the company is too often being tied up in the pension scheme.'
Separate research by Deloitte suggests that companies are increasingly turning to Asset Backed Contributions (ABCs) to fund smaller pension scheme deficits, whereby the company and pension scheme transfer assets into a Scottish Limited Company which then leases them back to provide an income stream.
According to the firm's report 'Pension funding solutions: The evolving ABC market, 80% of ABCs in 2013 were used to fund deficits of less than £100m, up from 50% in 2010.
Deloitte says 40 ABC structures have been implemented since 2010, funding more than £5bn of pension schemes' deficits. While they were traditionally viewed as an option only for large pension schemes, their increased flexibility and lower implementation costs now make them attractive to small schemes.
David Robbins, pensions advisory partner at Deloitte, said: ' ABCs offer an alternative for companies that don't want to pay cash into their pension schemes with no hope of ever seeing it again if a scheme's fortunes improve. A variety of assets classes are being used in ABCs. Loan notes have become a more popular asset choice but real estate, stock and intellectual property are also used.'
