That’s the warning of a new report by KPMG, which has been looking at the pension schemes of the UK’s biggest listed companies. Apparently their combined deficit quadrupled to £80bn in the year to June, thanks to plunging stock markets and asset values – and over the next few years, many firms will run up such big deficits that they won’t have enough cash in the business to clear them. This is clearly going to be a huge drag on corporate performance in the medium term – and it’s another nail in the coffin of the final-salary pension scheme...

According to KPMG, FTSE 100 firms are now spending as much money paying off past deficits as they are on current contributions – so they’re spending as much on past employees as the present lot. Within five years, it reckons 80% of cash paid into pension schemes will be spent on deficits, and not everyone will be able to afford that – KPMG reckons 22% of these big companies just won’t have enough cash to pay the bills (only 12 are currently in surplus). OK, so deficits will probably shrink as the markets recover (hopefully KPMG took this into account) but something clearly needs to be done.

One likely consequence is that it will almost certainly hasten the demise of the defined-benefit pension scheme, which has been dying a slow and painful death for years. This week Balfour Beatty, which has a deficit of over £500m, told staff that post-2011 pay rises wouldn’t count towards their pension; while the likes of Barclays, Morrisons and IBM have recently closed their final-salary schemes to existing staff as well as new joiners.

Since 85% of the UK’s 8,000 such schemes have a funding shortfall, according to the Pension Protection Fund, we assume more will follow suit. Indeed, we’d be amazed if there are any left in a decade’s time – however much the unions are likely to carp about it. The GMB tried to dismiss this report as ‘scaremongering’, but it’s pretty obvious that these schemes just aren't affordable in the longer term.

And besides, the problem can't be resolved in isolation: if companies are having to divert lots of cash to plug their pension deficit, it means they can’t invest it in assets or people – which will ultimately mean they’ll be left behind by rivals who aren’t saddled with this kind of burden. Look at BA, which is struggling to such an extent that it’s just had to take back some cash from its pension fund, despite its huge deficit. There’s no way it can hope to compete unless it finds a way of resolving this issue – and it’s by no means the only one...

In today's bulletin:
France and Germany growing again - as UK trails behind
Soaring pension deficit threatens to cripple FTSE firms
Saving the high street - on a £50k budget
Nietzschean SMEs say they will be better for the recession
Investors doomed to declining dividends

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