Pension woes as blue-chips buckle

THE latest downward lurch in the stock market threatens to turn a looming pensions problem into a crisis for hard-hit companies such as BT, ICI and British Airways. Already braced for hefty balance sheet 'hits' from new accounting rules on pension liabilities, they must now cope with these in a much-weakened position after the US attacks and the stock market slump.

Some leading companies' market value has shrunk so far that they are dwarfed by the size of their pension funds. British Airways' fund was last valued at £10.5bn, nearly seven times BA's own market value. The fund may have shrunk since, but the gap is striking. That will make the impact of the Accounting Standards Board's FRS 17 rule dramatic. It replaces the old smoothing- over of pension costs with full recognition of yearly changes.

If, for example, BA's pension fund drops 4% and causes a £420m shortfall, that will ultimately need to be shown in its profits. Last year, this would have turned BA from £150m profits to £270m losses.

Because of the high impact, FRS 17 is being phased in. Phase one, for firms reporting after June 2001, is to show pension effects in a note to the accounts. The first signs of pain are appearing. BT provided £393m in its last quarter; the tiny Eliza Tinsley group slashed its dividend. Phase two, from June 2002, is to show two years' pension effects. Phase three, from June 2003, is the full Monty - provisions in the balance sheet and against profits.

Since the ASB outlined its plans, shares' slump has made big companies more vulnerable to the charges. Andrew Kelly at fund manager Scottish Value, who has researched the problem, says: 'The companies most exposed are those with a large workforce close to retirement, or a much diminished workforce to carry a large number of pensioners.'

For companies already in difficulty on trading, such as Marconi, ICI and Invensys, pension costs add another problem. Gas pipeline group Lattice's pension fund, though much bigger than its market value, is in surplus. Kelly fears pension funds are also facing an increasing squeeze between higher burdens from longer life expectancy and lower returns as interest rates and markets fall.

He says: 'The days of companies taking pension holidays are over.' Now the risk is that they need to increase contributions sharply - and 'for some companies, it may be the last straw for schemes that guarantee pensions based on final salaries'.

Another FRS 17 change could have equally far-reaching effects. It requires pension funds to value their liabilities based on the yield on corporate bonds. That could persuade them to switch out of shares and into bonds.