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The UK's biggest employers' group warned yesterday that companies could face intense pressure to switch funds into final salary pension schemes just when they need cash reserves to get through the credit crunch.
The CBI said it feared pension fund trustees, regulators and the government could over-react to growing pension deficits with demands to close shortfalls created by the economic downturn. It is concerned this would weaken firms' finances at a time when banks are refusing to extend credit to many businesses.
The CBI pointed to government figures showing that although in June last year defined benefit pension schemes were £53.4bn in surplus, tumbling share prices means final salary schemes now have a collective deficit of £194.5bn.
Investors, who are keen to protect dividends, argue that companies cannot afford to pay off the deficits. The CBI is anxious they will sell their holdings in firms that are told to make top-up payments.
The CBI said: "Those deficits are beginning to play on investors' minds, and we fear that they will not allow for the longer term, secure nature of this pensions funding, and will mark those firms down."
A vote of no-confidence in firms with large pension fund deficits could hit several of Britain's top 100 companies, including British Airways and BT, and drag down the FTSE 100 when it is already more than 30% lower than a year ago.
The pension regulator has indicated it will examine fund deficits on a case-by-case basis. It is not expected to tell firms to increase their funding. However, some pension consultants believe many firms will ask for dispensation to cut their support for pensions, which could trigger a row with the regulator. The CBI is also concerned that pension trustees could ask firms to reduce their deficits.
Central to the CBI's argument is that pension deficits are artificially high following an unusual drop in share prices.
However, accounting rules insist that companies show a snapshot of their pension fund losses in their annual accounts. In recent years these have shown dramatic falls and encouraged many companies to close their schemes to new employees or close them down altogether. The majority of schemes invest most of their funds in various stockmarkets and have suffered huge losses.
John Cridland, CBI deputy director general, said: "An over-reaction to deficits could be a factor in sending some firms under, and leave the rest struggling for capital at a time when they need it most. We urge investors and trustees not to feed the fire.
"Instead they should step back from these spot valuations, and recognise that the deficits are a snapshot indication that does not reflect the full picture."
Cridland said he wanted investors to take a longer-term approach "which recognises that the underlying funding position of pension schemes is strong, and that deficits will be made up over time".
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