Final salary pension deficits of the UK's top 100 companies fell by £37bn in 2006 because of increased stock market returns.
Research by consultant and accountant Deloitte reveals the total deficit of final salary pension plans in the FTSE 100 is now £38bn, compared to a total of £75bn at the start of 2006.
It claims the reduction is because pension scheme assets have befitted from double-digit investment growth in share prices, as it points out pension schemes tend to invest around 60% of their assets in the stock market, and over the past year UK shares have increased in value by around 17%.
However Deloitte also admits an increase in the contributions made by employers into their final salary pension schemes over the past few years have also helped reduce deficits, as it states the FTSE 100 companies currently contribute around £15bn a year to defined benefit (DB) pensions.
But despite the reduced deficit level, the company says the next year will see mortality becoming a big issue for employers, as businesses are under increasing pressure from the Pensions Regulator to reconsider their allowance for increasing life expectancy, which could add an extra £20bn to their pension deficits.
As a result of the strong possibility of having to pay out benefits for far longer than originally expected, Deloitte says most final salary pension plans will be looking at two types of investment strategy over 2007.
It says schemes could be considering Liability Driven Investment (LDI), where the assets are specifically matched to the liabilities, as although this would remove the future possibility of any equity out-performance it would also reduce the risk of possible stock market crashes.
Alternatively Deloitte says the other route an increasing number of pension schemes are taking is to look at investing more in equities and other return-seeking asset classes to try and meet their liabilities through higher risk investments.
David Robbins, pensions partner at Deloitte, says the company expects to see a move to equities and emerging asset classes over 2007.
He adds: “LDI has been the buzzword for 2006 and involves stabilising the investment risk by matching assets to the liabilities. However a number of large pension schemes have recently made a move to private equity and hedge fund investments as they seek higher reward for the risks they are taking.”
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