'Pension 'black hole' is hurting recovery'

Britain's biggest business group will today warn Gordon Brown that the £160 billion pensions "black hole" is stifling economic recovery by forcing firms to slash investment.

The CBI will also raise fresh doubts about the Chancellor's forecasts for the economy and the public finances, predicting that business investment will fall by a further 2.2 per cent this year instead of bouncing back by more than four per cent as Mr Brown predicted in the Budget.

According to the CBI's analysis, British firms will have to shell out about £36 billion over the next three years as they struggle to close the £160billion pensions gap that opened up after the dotcom bubble burst. Rolls-Royce, British Airways and BT are among high-profile companies plagued by pension problems.

CBI chief economist Ian McCafferty said the size of the pension fund deficit was not too large to be absorbed by the corporate sector. "What it does do is constrain disposable income significantly over the next few years. The resources for a recovery in investment are going to be limited," he said.

In April's Budget, the Treasury pencilled in a recovery in corporate investment from this year, as the balance of economic growth shifts back from the consumer to the business sector.

But the CBI expects investment to rise by an average of only 2.2 per cent in 2004 and 2005, compared with more than 10 per cent when the economy was recovering from the early 1990s recession. With investment picking up so slowly, the CBI says economic growth will struggle to hit three per cent over the next three years.

Mr McCafferty said there would also be a knock-on effect on the public finances, since corporate pension contributions are taxdeductible.

Mr Brown's forecasts for government borrowing have been widely questioned since official figures this month showed the Treasury slipped £14billion into the red between April and June - more than half the £27billion he has allowed for the entire financial year.

The CBI says the pensions black hole could cut the Treasury's revenues by up to £2 billion in each of the next three years.

Some economists said the hit to company profits would not necessarily be as large as the CBI is warning. They said companies might put off tackling their pension fund shortfalls fully, and a sustained stock market recovery would make the problem seem less severe as funds were revalued.

The Government published pension fund proposals in a White Paper this year, making it harder for firms to wind-up schemes without maintaining employees' benefits, and suggesting a central rescue fund to compensate workers when schemes go bust.

CBI director-general Digby Jones criticised the plans for raising the cost of providing final salary pensions, which have already been abandoned by many firms as too expensive. The CBI has set up a strategy group to come up with alternative solutions.