Market Woes Blow Out Half of Pension Surpluses

July 30, 2007 ( - Last week's four-day stock and bond market rout eliminated half the accumulated surplus in U.K. pension plans run by FTSE 100 companies built up since the market trough in 2003, according to Hewitt Associates.

The Financial Times reported that, according to Hewitt, market movements brought the aggregate surplus of plans down to £15.3 billion by the close of trading on Friday, from £31.5 billion on July 23.

Rising interest rates and strong stock markets propelled the plans into surplus in April, after years of wallowing in deficits. The surplus for FTSE 100 companies peaked at £39 billion on July 13, Hewitt calculated.

The sharp swing in the fortunes of pension plans should make companies re-think the wisdom of remaining so heavily invested in equities, said Kevin Wesbroom, principal consultant at Hewitt. “Are plans setting themselves up to deal with volatility or are they going back to the bad old days?” Wesbroom told the newspaper. “Why are you giving yourselves this roller coaster ride?”

Some pension consultants have been urging plans to crystallize strong gains in the stock markets and move into bonds while yields are relatively high, the Financial Times said. But Wesbroom said that many trustees and employers appeared to have forgotten falling interest rates can cause as much damage to plan balance sheets as falling share prices.

Hewitt calculates that about two-thirds of the £15 billion fall in the surplus reflects plunging equities while the remaining third reflects the drop in gilt yields.

A handful of plans moved to match their investments to liabilities after the trough of pension deficits in 2003.