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. Last Updated: 07/27/2016

U.K. Pension Fund $259Bln Shy

LONDON -- A ?160 billion ($259 billion) pension fund shortfall will crimp British companies' ability to invest, slow down economic recovery and threatens the country's public finances, a report published Monday shows.

Corporate investment -- crucial to economic growth -- will shrink by 2.2 percent in 2003 as companies divert cash to plug holes in their pension funds, according to a report by the Confederation of British Industry.

This will put the brakes on economic recovery, hit tax receipts and put further pressure on government finances.

"Clearly the accumulated deficits many companies are facing ... are going to have a significant impact for investment -- capital expenditure growth -- over the next couple of years," said Ian McCafferty, chief economic advisor at the CBI.

"It is going to be difficult to see a significant increase in GDP growth."

Britain's corporate pension funds have seen the value of their assets slashed by three years of falling stock markets.

The CBI estimates that the shortfall between the value of assets and pension liabilities for British companies has hit around ?160 billion, caused by the sliding value of stock portfolios, demographic changes and new accounting rules. Although companies do not need to make up deficits immediately, they will have to put aside extra money to cover their liabilities over the next decade.

The CBI reckons nonfinancial companies will increase spending on pensions by ?8 billion in 2003 rising to ?12 billion in 2004 and ?16 billion in 2005.

The double whammy of lower investment and shrinking corporation tax receipts will throw further doubt on the accuracy of Chancellor Gordon Brown's predictions for GDP growth and public borrowing.

Higher level of pension contributions will reduce corporate tax receipts by between ?1 billion and ?2 billion over the next three years, the CBI's report said.

Recent forecasts of public borrowing of ?31.6 billion in fiscal 2003 -- already above Brown's target of ?27 billion -- and ?24 billion for 2004 are likely to be too modest, McCafferty said.

Factoring in the effect of pensions, current predictions for public borrowing both this year and next "might be nudged up a little more," he said.

Brown's forecasts have already been undermined by weak economic performance in the first half of the year.

Preliminary figures show gross domestic product expanded by 0.3 percent in the second quarter after inching ahead by just 0.1 percent in the first three months of the year -- a slower rate than in the first half of 2002.