The credit crunch has seen pension scheme funding of FTSE100 companies fall by more than £50bn in a year, Lane Clark & Peacock LLP (LCP) research suggests.
The firm’s 15th annual Accounting for Pensions report found UK pension schemes of blue-chip firms had a net deficit of £41bn as at mid-July 2008, a drop of £53bn from a £12bn surplus in July last year.
LCP says the drop in funding, required to meet obligations to existing members, is the largest 12 month swing in FTSE100 levels since the introduction of modern pensions accounting methods in 2002.
It says the credit crunch, equity market volatility and rises in expected inflation have caused severe swings in funding levels over the last year, and argues it emphasises the importance of assessing and managing pension risks effectively.
Bob Scott, partner at LCP says: “UK pension schemes of FTSE100 companies enjoyed a brief period of surplus until early in 2008.
“Some companies chose to spend their surpluses on various forms of de-risking activity including buy-out, purchasing financial swaps and reducing their exposure to equities.
“Events of the last year demonstrate the importance of assessing and managing pension risks and being prepared to take opportunities when they present themselves.”
LCP says the sharp plunge in funding levels is despite FTSE100 companies pumping nearly £40bn into their pension schemes over the last three years, and some taking steps to reduce risk, with the average level of equity investment falling from 59% to 53% in 2007.
It says a further £9bn has been added to FTSE100 deficits between 2006 and 2007 as a result of longer life expectancy assumptions.
LCP says a “rapidly evolving” buy-out market has led to the first FTSE100 companies offloading pension liabilities, pointing to the examples of Lonmin and Friends Provident. It says it sees scope for “significant further buy-out activity” within the FTSE100, even as prices start to edge up.
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