Pension deficit doubles to £55bn

THE scale of Britain's collective company pension deficit has been rammed home in a report that makes chilling reading for scheme members and their employers.

The FTSE 100 index of leading shares would need to rise a staggering 50% to 6000 from its present levels to eliminate UK plc's multi-billion pound pension fund deficit, says an influential report by consulting actuaries Lane Clark & Peacock.

The Footsie last topped 6000 in March 2001. Then, the combined value of companies in the index was £1,453bn, £460bn more than they are worth now. It is likely to take a long time before the battered market can contemplate scaling those heights again.

The findings make a mockery of executives who have implied that their pension deficits will simply disappear once the stock market picks up.

The combined shortfall in final salary funds among Footsie firms has ballooned to more than £55bn in the year to July 2003, LCP says. That is more than double last year's deficit, and equivalent to about 6% of the total market capitalisation of the Footsie.

Other even larger - numbers have been bandied about, with the CBI last week estimating a £160bn black hole. The figures vary according to exactly what each individual survey is measuring. But the point remains the same - the problem is huge.

For every £100 of obligations schemes have racked up, they hold only £80 of assets, LCP says. Alarmingly, there was a £600m shortfall in employers' contributions last year. During 2002, funds' obligations to members increased by a total of £4.2bn, but companies only made £3.6bn of contributions.

Some, notably BP, which has seen its pension fund plunge from a surplus of £1.5bn to a deficit of £3.4bn, have begun to act responsibly. The oil giant is to plough £1.1bn into its pension schemes to start making good the shortfall. But as LCP partner Bob Scott points out, 'not every company has billions lying around to put into their pension fund'.

Several companies, including Friends Provident and Rentokil Initial, last year paid nothing into their final salary schemes. Many will have to increase contributions, which could act as a significant drain on their profits. If they do not, the gulf between employees' expectations and companies' ability to meet them will grow ever deeper. Added Scott: 'If it went on, companies would be systematically storing up trouble.'

Final salary pension funds, once the gold standard for retirement provision, have been ravaged by the steep falls in share prices over the past three years. They have also been hit by the ageing workforce, which means their liabilities are increasing. Most havoc has been wreaked among companies who formed the backbone of traditional, paternalistic British industry.

The report puts seven firms on 'red alert' because their balance sheets are highly exposed to share volatility. These are BAE Systems, British Airways, BT Group, ICI, Invensys, Rolls-Royce and Royal & SunAlliance.

Despite the mauling funds have taken, their love affair with the market has continued practically unabated. The proportion they invest in shares has dropped only slightly, from 67% in 2001 to 63% last year.

Chemist chain Boots is one of the few funds still boasting a surplus, thanks to its wholesale switch out of shares into bonds. But its bold move has not provoked a copycat exodus from the markets.

Firms are also making gung-ho assumptions about how shares will perform. Most assume growth in their holdings of at least 7% a year; the market fell more than 22% last year. Some, including Reed Elsevier, Cadbury Schweppes and ICI, are betting on gains topping 8.5%.

They have every incentive to err on the positive side, as cutting growth assumptions could knock millions off company profits under FRS17 accounting standards. The International Accounting Standards Board, which is due to introduce a new regime for pension fund accounting in 2005, is expected to close the loophole.