Small firms feel pensions pain

THE crisis over company pensions is poised to deepen this week with the news that under new accounting rules, nearly seven out of ten medium-size firms are showing a shortfall in their funds.

International business consultancy Mercer examined the annual reports of 47 of Britain's biggest 100 companies and 146 businesses in the FTSE 250 index. It found that the pension funds of middle-ranking businesses were significantly more vulnerable than those of the bigger corporations.

But even when the best company schemes were taken into account, nearly two-thirds still showed a black hole in their funds. Worse, in four out of ten cases, the shortfall was 10% or more.

Mercer was researching the impact of the new FRS17 accounting rule, which requires companies to give annual snapshots of their pension funds' assets and liabilities. Its report will heighten fears that major company schemes will need to inject tens ofbns of pounds to make good their shortfalls.

Tim Keogh, the Mercer partner who compiled the research, said: 'If stock markets were to fall by another ten%, the worst-funded 25% of schemes could face a very bumpy ride.'

Nearly 40% of the companies surveyed by Mercer have pension funds worth more than 50% of their entire assets. This makes them more like pension funds that have companies attached than the other way round, says Keogh. Even small changes in pension schemes that are so big in relation to the company could hit profits and dividends.

Keogh said: 'Earlier studies showed that if the FRS17 rule had been adopted at the end of December 2000, the vast majorityof companies' balance sheets would have been strengthened, but the situation now looks more patchy.'

Financial Mail has calculated that a company such as BT, whose pension scheme has a big exposure to equities, will have seen the deficit on its fund double to about £4.5bn after the stock market fall in the first half of this year. And BP, which had an FRS17 deficit of nearly £680m at the end of last year, could now be facing a £2.1bn gap, while Marks & Spencer's stated shortfall of £419m will have widened to about £700m.

But Boots, which last year moved its pension fund out of the stock market into bonds, has probably escaped a £600m drop in the value of its £2.4bn scheme.

The Mercer pensions study also shows that one company in three now offers employees a defined contribution pension scheme, which transfers the shortfall risk from the employer to retiring staff.

Following the Boots move, one company in five now has less than 60% of its pension assets in shares.