KPMG predicts more ‘pension zombies’ will become insolvent as they struggle to maintain large deficits

The latest deficit numbers for UK corporates were released this week indicating that cumulative exposure of the Pension Protection Fund to UK defined benefit scheme stood at £227bn. This represents a 32% increase on levels experienced one year ago, and has remained over £200bn for each of the past twelve months.

Companies registered in South West make up 3.3% of this £227bn figure. However, Wales seems relatively sheltered from the issue, with companies in the country making up just 0.4% of the deficit.

KPMG’s restructuring experts have predicted that persistently high pension deficits are likely to force more companies into administration. The PPF’s risk analysis, published recently also shows its exposure to insolvencies over the coming year has increased by a factor of six over the past year to £1.8bn.

Joff Pope, associate partner at KPMG, commented: “Pension deficits appear to have hardened at a high level and, as a result, companies with large pension liabilities can no longer cross their fingers and hope the problem will go away. In many cases, large companies can manage the situation, but for SMEs, or those spun out of the public sector, the problem may be insurmountable. We have already seen AEA Technology go through a ‘pre-pack’ administration process in the last week, as the ex public sector company could no longer sustain a £450m pension deficit, which dwarfed its revenues. We have advised on a steady pipeline of cases in the past year, with similar pensions issues, and we therefore expect to see more ‘pension zombies’ tipped into administration.

“While a substantial imbalance between profit and pension liability may seem impossible to resolve, companies do still have options and strategies to deal with pension liabilities. The PPF can agree a deal to take the scheme and avoid an otherwise inevitable insolvency. But companies should be aware that the PPF negotiates hard and will demand a significantly better return than expected on insolvency and an anti-embarrassment equity stake. The recent administration of Dawson International received some criticism, which suggested the PPF had closed the door on compromises. This is fortunately not the case. To some extent, setting precedent and agreeing compromises with the PPF is still in its infancy but we have been involved in an increasing number in recent months and expect to see a meaningful change in the level of compromises agreed over the next year.”

KPMG has also analysed the latest defined pension scheme deficits by region.

Key highlights:
· Unsurprisingly, around half of the UK’s pension deficit lies with companies registered in London, comprising financial institutions and large listed PLCs;
· However, 50% of pension deficits are held by companies registered in the regions and comprise mainly of manufacturing businesses;
· Manufacturing represent 41% of schemes currently in PPF assessment;
· Wales, Northern Ireland the North and East Midlands appear to be sheltered from the worst.