More bad news on company pensions

2006

There was more bad news for Britian's company pension schemes with the release of new figures showing that the total pension deficit for FTSE 350 companies increased from £75bn to £93bn between 2004 and 2005.

Pension scheme deficits in the FTSE 350 companies rose by almost a quarter (24 per cent) in 2005 despite strong equity market performance, according to research by Mercer Human Resource Consulting.

Projections for 31 December 2005 year-end accounts suggest that deficits increased from £75bn in 2004 to £93bn last year.

The forecasts revealed that pension asset values in the FTSE 350 companies rose by around £60bn to £422bn, but scheme liabilities grew by a similar amount, therefore increasing the total deficit.

Last month, figures from consultants Deloitte & Touche found that the pensions deficits of Britain's 100 largest public companies have grown from around £65 billion to £75 billion over the past year despite improved investment markets and a threefold increase in contributions over recent years.

"Favourable investment performance did little to dilute the value of pension scheme deficits in 2005," said Tim Keogh, Worldwide Partner at Mercer.

"Bond markets rose at the same time as equity markets, causing yields to drop and liabilities to grow. The need to allow for increased longevity has been an additional headwind.

"Just as people have to pay more to trade up their house after a property boom, despite the value of their current home increasing, employers have to contribute larger cash sums to reduce their pension scheme deficits when all markets rise," he added.

The figures are calculated on the basis of international accounting standards (IFRS), which will be used for the formal accounts of listed UK companies for the first time as at 31 December 2005. This standard uses a similar approach to its predecessor FRS17, but it still measures deficits at a lower level than if schemes were to wind up. The FTSE350 companies account for around half of UK occupational pension schemes in term of fund assets.

In 2004, the FTSE 350 companies made contributions of around £5bn to reduce their pension scheme deficits. While the total level for 2005 will not be known until companies publish their annual reports, anecdotal evidence suggests that the level will not be radically higher.

Mr Keogh said: "Our experience suggests that many companies have waited to find out the cost of their PPF levy and the strength of the new funding regulations before they revise their contribution plans. Despite some companies making substantial contributions in 2005, often to facilitate a major deal, we have yet to see the radical change in contribution strategy the Pensions Regulator is probably hoping for."

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