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The government's beleaguered pensions lifeboat scheme could see its funding shortfall double to more than £1bn after the collapse of the Canadian telecoms firm Nortel earlier this month.
Already forced to rescue the schemes of collapsed companies such as Woolworths and Lehman Brothers, the Pension Protection Fund (PPF) has been asked to step in to pay the retirement incomes of Nortel's 43,000 British pensioners after the parent company went under with huge debts.
Figures revealed that the Nortel scheme's accounting deficit of £250m ballooned to more than £500m once the company had collapsed. The PPF's last accounts revealed a shortfall of £500m, making a total of £1bn.
The Nortel rescue came as Moody's, the ratings agency, warned that pension deficits posed a significant risk to UK corporations following a dive in share prices over the past year and a rise in the cost of funding pensions. The agency said that pension shortfalls were the equivalent of debts and were an additional burden when many companies had come under pressure from banks to cut their debt.
According to the latest government figures, employers offering guaranteed retirement schemes have suffered a shortfall of £195bn in recent months. Opposition MPs and employers' groups have lobbied ministers in recent weeks to provide support for company pension schemes before they became unaffordable. The CBI called on ministers last week to relax strict rules and allow firms more leeway to fill pension deficits.
The National Association of Pension Funds, which represents occupational schemes with about £700bn under management, said about 25 of Britain's largest firms were planning to close their schemes entirely after a rise in the cost of providing guaranteed pensions.
The pensions expert John Ralfe said the PPF would need to do more than "paper over the cracks", as it was facing a potentially ruinous 2009. He said ministers needed to make clear how they intended to fund the PPF's increasing deficit if employers refused to pay higher fees.
The PPF has already amassed billions of pounds of pension liabilities less than four years after it was created. The organisation's funding comes from levies charged against healthy pension schemes. However, the fees have failed to plug a growing shortfall, which according to the fund's last accounts had reached £500m.
Ralfe said the collapse of Nortel UK, which is a main sponsor of the 2012 London Olympics, would strain the PPF's finances. The cap on benefits applied by the PPF would, he said, reduce the burden to £900m, while cash inside Nortel UK and its Canadian parent that is earmarked for pensions could reduce the deficit by another £400m. However, a £500m deficit would still make it the largest occupational fund to be rescued by the PPF and would double its existing £500m deficit.
A spokesman for the PPF said that its staff would initially assess the eligibility of the fund. Once it is accepted, which is almost certain, the pension scheme would usually become part of the PPF within two years. The scheme pays 90% of accrued benefits to deferred members and employees, and 100% to existing pensioners, with a cap of £28,000.
He said: "We were expecting a rise in the number of schemes applying to the fund. The looming recession meant it was obvious that would happen and we have heavily modelled how that will affect the fund. We are comfortable with the situation."
He said the fund was under less pressure than many people imagined because the scheme members are not yet retired. "We don't have to pay pensions in one hit, but over decades as people retire."
Moody's Investors Service warned that occupational pensions funds faced a tough year. Its report, Pension Deficits: Back on the Agenda, said Britain's top 20 companies ranked by pension plan assets had pension obligations totalling approximately £230bn in 2007.
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