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The Actuary The magazine of the Institute & Faculty of Actuaries

Danger – private sector black hole

Lane, Clark & Peacock (LCP) launched last month its 11th annual Accounting for Pensions Survey together with a first annual survey of European pension schemes.

FRS17 pension scheme deficits of FTSE 100 companies have dropped from £55bn to £42bn in the year to July 2004 as a result of higher equity returns and a surge in company contributions. Despite this overall improvement, the FTSE 100 index would still have to climb above 5900 to eliminate the combined FRS17 deficit.

Many companies may not be reflecting the latest life expectancy findings in their accounts. If the most recent figures were used, this could increase deficits by a further £20bn.

Many companies have reversed the trend to underfund their schemes, significantly boosting their contributions. Pension contributions over the year (£10bn) exceeded the cost of benefits (£6.6bn) by £3.4bn (last year, there was an FRS17 contribution shortfall of £0.6bn).

The top 50 European blue-chip companies have deficits totalling _116bn, according to analysis of the Dow Jones STOXXSM 50 index, included in the survey for the first time. Germany reports the highest average pension fund deficit in Europe at _4.3bn per company in the index, followed by Spain with _4.0bn. The UK was third highest at _2.8bn per company, which is surprising given the level of funded provision in the UK compared to the rest of Europe.

On average the share prices of the seven companies highlighted in last year’s survey with the biggest exposure to equities in their pension funds, including Rolls-Royce, ICI, and British Airways, performed well this year with an average return of over 20%, compared to the FTSE 100 which returned 10%.The LCP survey acquired a certain notoriety when used to suggest that Banco Santander – which is bidding for Abbey National – had an unfunded pension deficit of almost _10bn measured according to international accounting standards.