A third of finance chiefs fear pension hole could sink firm

More than a third of finance directors say their company is at risk from its pension scheme, according to a report published yesterday.

A survey by the actuaries Mercer Human Resource Consulting found that 39% of finance directors and treasurers reported that their pension funds increased the likelihood of insolvency and presented "a moderate or severe risk" to their credit ratings. As many as 30% think their profits are at a similar level of risk.

The response from FTSE 350 directors supports other recent surveys showing that companies are keenly aware of the knock-on effects of large pension deficits. Many have increased their contributions in recent years only to find that low interest rates, increased life expectancy and rising costs from regulation have kept deficit levels high.

Mercer's study found that a fifth of employers have borrowed to close a deficit in their schemes. The actuaries said borrowing was an attractive option because it should be broadly credit-neutral.

"It involves paying back one loan by raising another, arguably on better terms because of the tax advantages, so it should have no impact on analyst and credit ratings."

Finance directors are also concerned that their employee pension funds have remained invested largely in equities. The majority said shareholders would prefer the pension scheme to switch into bonds.

Tim Keogh, of Mercer, said: "While most companies are at limited risk from their pension scheme, there is a significant minority for which a deficit has become a major financial issue."

The survey also found that 37% of companies take independent advice on the investment strategy followed by trustees. Mr Keogh said: "In future, finance directors are likely to want more influence on pension fund investment strategies, as fluctuations in asset and liability values can have major implications on profits, balance sheet strength and cashflows."