Employers pay up for pensions

The increase in average life expectancy means that employers are having to pay more money into company pension funds.

Total contributions paid into pension schemes by major UK employers rose by 16% in 1999/2000, according to a survey by IDS Pensions Service.

Many of the industry's major players are working hard to find a way of improving returns for retiring employees.

Gillian Cook, an associate at the consultancy, Bacon & Woodrow, recently told BBC News Online that there is a "very big risk" that many people of today's generation will not have enough to retire on.

In addition to catering for people who are living longer, employers are also having to meet the costs of:

• employees being made prematurely redundant
• low inflation
• the abolition of reclaimable tax credits on UK company dividends
• and a higher number of scheme members that are pensioners.

Coping with older members

The increasing age profile of scheme members has prompted employers to tackle potential deficits in the funds.

Also because a higher proportion of members belonging to more mature schemes are pensioners, pension funds are having to shift the balance of their assets.

To ensure that the pensioners have a steady income, pension schemes are choosing to invest more in bonds - which pay steady, but relatively low returns - rather than volatile - but more lucrative - equities.

Inevitably, this means that the pension funds make less money for members that have not yet reached pensionable age.

To compound these problems, the arrival of low inflation reduces the amount of return from bond investments, which pay out according to an interest rate.

One-off payments

IDS Pensions Service analysed 260 pension schemes in total and found that employers paid £4.3bn during the last full scheme year.

About one-fifth of these employer contributions were one-off special payments to top up pension funds.

For example, in March 1999, British Telecom made a special contribution of £200m to cover shortfalls in its pension fund.

A year later, BT made another £230m payment to cover redundancy costs.

The average employer contribution - among 70% of employers within the surveyed group - equalled as much as 20% of the payroll.

Nearly 30% of the schemes were not paying contributions because they were operating a "holiday" from making payments.