UK – The pensions deficits of FTSE 100 companies could be wiped out in just over one year’s time, according to analysis by Aon Consulting.
According to Aon’s analysis of consensus forecasts for equity and bond markets, the overall pensions deficit for the benchmark FTSE 100 index fell from 65 billion pounds in December 2002 to 56 billion pounds at the end of August this year.
If equity markets continue with their upwards trend, and the FTSE 100 hits 4,900 points by the end of 2004, the overall pensions deficit will have fallen to 41 billion pounds. Furthermore, says Aon, if the market rise is combined with an increase of 0.5% in long-range corporate bond yields by the end of 2004, the deficit should be completely wiped out.
Optimism has also been shown by senior executives in charge of pensions at FTSE 350 companies, says Aon. A recent survey highlighted that 77% are cautiously confident that things will improve for their company’s pension funds over the next three years.
Simon Martin, head of research at Aon Consulting, said: "These forecasts provide further evidence of growing confidence after a period of major turmoil in the pensions market. However, not all companies can look forward to the end of their pensions deficits at the same time. This will depend on the investment mix of their pensions funds and their exposure to equity markets.
"Our analysis would suggest that it would be illogical for the managers of company pension funds to exit the equities market, as some have recommended. Clearly, if pension fund managers continue to shift their holdings out of equities, this will prolong the recovery of both the market and the company’s pension fund.”
That said, Martin warns of over-reliance on market rises to solve pensions problems. “Pension fund managers need to better understand what investment risks they have and their exposure to the markets so that they are able to make more informed decisions. Employers need to take a more active role in managing their pension funds,” he says.