City slump fuels pension crisis

THE full damage inflicted by plunging stock markets on the pension funds of some of Britain's best-known companies is revealed today by Financial Mail.

Several of the UK's biggest corporations have seen their pension shortfalls balloon by up to 50% in recent weeks as stock markets have tumbled.

Most company schemes are still heavily invested in equities and are highly exposed to the impact of any further share price falls.

Financial Mail's research indicates that the size of the shortfall in the pension fund of aero engine manufacturer Rolls-Royce has climbed from £566m to about £850m since the start of the year. The group has about two-thirds of its pension fund tied up in the stock market.

Rolls recently reported a net £284m shortfall in its UK fund. The figure was struck under controversial FRS17 accounting rules that force companies to declare the state of their pension fund in their accounts. But the £284m was net of tax and excluded shortfalls on funds held outside the UK. Rolls said its deficit would be wiped out if stock markets rose by 15%. But since its pension fund was valued at the end of last year, the FTSE 100 index has fallen 12%.

Marks & Spencer, long considered a benchmark pension scheme for UK companies, has suffered a similar blow. With about two-thirds of its pension fund still invested in equities, the size of the shortfall is reckoned to be about £600m - compared with a recent estimate of £400m.

Other big companies such as BT, AstraZeneca, ICI, BAE Systems, HSBC and Sainsbury are also facing even bigger pension fund holes than reported.

Many blame the new accounting standard, which obliges companies to take an annual review of a scheme's assets and liabilities. 'This highlights the problems with FRS17,' said a spokeswoman for the National Association of Pension Funds, whose members own one in three shares. 'A snapshot is not an adequate way of looking at a pension fund scheme, which invests long term.'

In an attempt to cut costs, many companies have rushed to close their final salary schemes to new members, who are forced instead to take out riskier, defined contribution plans. New research shows that a fifth of all final salary schemes are now closed to new members.

But shutting these schemes does little to cap payouts already being made. These are expected to grow at about 6% a year as people live longer.

Last week the Footsie plunged 290 points to 4630.8 - and some analysts are predicting it could fall to 3500. Since the start of the month, the Footsie has crashed through a series of key support levels.

First it fell below 5000, the bottom of the trading range for the first five months of the year. Analysts warned that once that was broken it could drop to 4750. But on Friday morning it dived below that point. Within hours it had crashed through 4648 - the low struck during the Asian financial crisis of 1998. The next possible stop is 4434 - the nadir reached after 11 September.

Mark Sturdy, technical analyst at hedge fund Weavering Capital, said: 'That September low is a huge psychological point. If we break through that, which I think we will, it will be an awful blow for retail investors. And once we go through that I do not see a support level for the market until 3539 which was the high in 1994.'

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