FTSE 100 pension schemes reached a net surplus for the first time since 2002, according to data from Lane Clark & Peacock (LCP), the actuary and consultancy firm.
In mid-July pension schemes of FTSE 100 companies reached a £12bn surplus, a dramatic rise on the £36bn deficit in the same period last year.
However, the FTSE 100 fell 8% at the end of July, dragging FTSE 100 pension schemes to a £6bn deficit.
The pension deficit of 80 of the world’s largest companies from Europe, the US and Japan, reached a £21bn net deficit in mid-July, an increase on the £88bn deficit at the same time last year.
FTSE 100 pension schemes remained in deficit from 2002 until April this year before rising to about £2bn in May.
Bob Scott, a partner at LCP says: “The surplus may not survive once companies reflect the latest mortality projections in their accounts. Also, companies whose pension schemes remain heavily invested in equities run material investment risk and the fragility of the surplus was highlighted by recent stock market falls. UK Pension Schemes are not out of the woods yet.”
A rising equity market boosted the FTSE by 20% over the twelve months to mid-July. Bond yields have also risen by 0.5%, reducing the value of the liabilities. LCP says the factors led to Royal Dutch Shell disclosing the highest funding level of a FTSE 100 company at 112% at the end of 2006, followed closely by Old Mutual at 110%.
The report also shows company contributions hit a record £13.4bn in 2006, up 19% from 2005.
The data highlights the significant investment risk in FTSE 100 pension schemes as many schemes are still heavily invested in equities. The average scheme had 57% invested in equities at its balance sheet date in 2006 with the highest having 81%. LCP estimates there is a 1 in 10 chance the position could fluctuate up or down by £50bn or more in a 12 month period.
The survey shows the level of equity investment has fallen over the year, despite rises in the market over that time and some companies have disclosed major changes in their investment strategy. HSBC recently moved significantly into bonds; Diageo and Alliance & Leicester have taken out swap contracts to hedge part of their liabilities against movements in interest rates and inflation and Tesco has diversified into alternative asset classes.
Many companies have updated their assumptions for mortality, reflecting growing evidence that life expectancy continues to increase rapidly. However, LCP says even the updated allowances made for future improvements in life expectancy may not be sufficient as each additional year of life expectancy adds around £12bn to pension liabilities.
Aggregate buy-out deficit for UK pension schemes of FTSE 100 companies is estimated at £90bn at mid-July 2007, down from £175bn last year. For the first time the 2007 report also analyses 80 of the world’s largest companies from Europe, the US and Japan.
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