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The Actuary The magazine of the Institute & Faculty of Actuaries
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Black hole partly filled

The combined pension deficit at top 100 UK companies has halved owing to the rise in equity markets last year, according to Hewitt Bacon & Woodrow, the pensions consultants. The firm estimates that the gap in pension funds at FTSE 100 companies has been reduced to under £50bn (_72bn), from a high of £100bn when markets were at their lowest point in March last year.

Raj Mody, principal consultant at Hewitt Bacon & Woodrow, said: ‘At last there is a sliver of good news for pension schemes.’ However, Mr Mody warned that schemes could still dramatically reverse, due to their heavy reliance on returns from equities. He said pension trustees faced the decision of whether to sell equities in favour of bonds to reduce their risk, or to continue to invest in equities in the hope of further strong gains.

According to the WM Company, pension funds took the opportunity thanks to the strength of UK equities during the year to switch money into UK bonds. This suggests that schemes are keen to increase their exposure to fixed income in order to better match liabilities but have a market timing overlay. The WM Company said UK pension funds achieved an average return of 16.8%, the first positive performance since 1999.

In contrast, the pension funding black hole in the US has continued to grow throughout 2003 despite sharp increases in global equity markets, according to the latest research from Standard & Poor’s. Pension under-funding among companies in the S&P 500 grew from $212bn (£120bn) in 2002 to a record $259bn in 2003 – an increase of over 22%.

Despite the S&P 500 index gaining more than 25% in the year, pension schemes managed to boost their assets by $112bn – or 12% – to $1.1 trillion from $951bn at the end of 2002. However, pension obligations have soared to an estimated $1.3 trillion, up $160bn from the end of 2002.