Study: UK Corporate Pension Deficit Doubles

August 6, 2003 ( - A London actuarial firm put some numbers to the depth of the UK pension crisis with word that the total funding deficit for FTSE 100 company plans more than doubled in the last year to £55bn from £25bn.

Actuaries Lane Clark & Peacock said in its annual survey that for every £100 of liability the plans held, they held an average of £80 of assets, according to news reports.  The study looks at pension funds measured on the FRS17 accounting method, which requires companies to adjust valuations of their pension assets according to the most recent movement in equity values (See  UK Accounting Board Delays Controversial Pension Rule ).

Lane Clark & Peacock found that of the 90 members of the FTSE with defined benefit plans, 77 now have a deficit. Some companies have swung dramatically from surpluses to deficits. Friends Provident, the insurer, had the highest ratio of pension scheme assets in last year’s survey, holding funds worth 135% of its liabilities.

Over the year the funding ratio has tumbled by 40% to 95%, Lane Clark & Peacock said. The largest fall in the value of a fund was at BP, which saw its fund deteriorate by nearly £5 billion in the course of 12 months from a surplus of £1.5 billion to a deficit of £3.4 billion.

In fact, the FTSE 100 index would need to climb about 50% to 6,000 for companies in the index to clear their pension deficit under FRS17, the actuaries said.

“Without significant additional contributions towards eliminating their FRS17 deficits, many companies will need their pension plans to continue to invest in risky investment classes, such as equities, in the hope of achieving investment returns in excess of the interest costs which are accruing on their FRS17 liabilities,” the report warned. It also highlighted that companies vary widely in the projections they are using for future returns on the equities in their funds.

It is an issue, which is increasingly being seen by analysts and investors as a material factor in assessing the overall attractiveness of companies. If companies’ real returns fall short of their projections, they may be able to close funds to new members or slash retirement benefits, but will probably also have to increase the amount of capital they are ploughing into the fund.