Pension fund deficits plummet


The pension fund deficits of Britain's largest 100 companies have fallen by £20.5 billion over the past year - the largest annual reduction in deficit since 2002 - thanks to rising stock markets and huge cash injections by companies.

New figures from consultants Watson Wyatt also reveal that the reduction in deficit during December alone, some £14.1 billion, was the second largest monthly reduction since 2003, exceeded only in March this year.

Aggregate deficits have only fallen below £40 billion once before, in April 2006.

Using the FRS17 basis, the deficits of the FTSE100 now stand at £39.9 billion compared to £60.4 billion at the end of last year.

"December was a particularly favourable month. Not only did share markets rise, by about 3 per cent, but so too did yields on AA-rated corporate bonds," explained Watson Wyatt's Stephen Yeo.

"Accounting standards require that all the liabilities are valued using such bond yields so deficits are particularly sensitive to them."

What's more, Yeo said, the fall may represent more than must a blip caused by favourable stock market conditions.

"Although deficits calculated on the FRS17 measure do fluctuate from month to month, because equity and bond markets don't necessarily move in tandem, there are signs that deficits may be experiencing the first part of a sustained fall.

"We estimate that FTSE100 companies will make deficit contributions of at least £5 billion in 2007, in part to reduce the requirement to pay levies to the Pension Protection Fund. Provided that investment markets do not experience adverse shocks, we expect 2007 to see a further reduction in deficits.

"Some smaller companies will be less well placed to make deficit reduction contributions. As a result, their share of the levies payable to the PPF will rise. In aggregate, PPF levies in 2007/8 will be double the amount payable in 2006/7, but some schemes could see their levy rise fourfold."