Rolls pensions gap 'hits £1.2bn'

AERO-ENGINE group Rolls-Royce has been urged to close an in-house scheme designed to top up staff pensions because it could undermine the main fund.

The move, which would abolish the additional voluntary contribution (AVC) scheme, highlights the precarious state of the main pension fund of the Derby-based group. As the stock market slide continues, the fund is facing an estimated £1.2bn shortfall.

The AVC warning came from the company's actuary, who said that unless the scheme was closed, money from the main pension fund, which is heavily invested in the stock market, would have to be used to subsidise it.

However, the recommendation to close the AVC fund has not been followed in full by the group's pension trustees. Instead, the trustees have changed the rules, with employees being barred from starting AVCs or increasing their contributions to them. An external AVC scheme, managed by Legal & General, is not affected.

A notice to staff says that the internal AVC scheme could 'prejudice the security of the basic benefits to which all members of the [main] fund are entitled'.

Rolls-Royce admitted five months ago that its main pension fund had a £700m deficit and warned that it would have to provide an extra £35m from its annual profits to plug the gap. Now company sources admit that £60m a year - almost a third of last year's profits - may have to be pumped into the pension fund to make up the shortfall.

Fears about the state of Rolls-Royce's pension fund have hammered the share price, prompting speculation about an emergency rights issue to repair the damage. The pension fund deficit is now more than two-thirds of the company's stock market value, which has shrunk to just £1.7bn.

Rolls-Royce operates three pension schemes with a total of £3.9bn in assets and £5.2bn in liabilities. The biggest scheme, the Rolls-Royce Pension Fund with 23,000 members, was closed to new entrants in 1999.