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Top UK corporate deficits down, spat over 2007 prognosis

UK - Consultant firm Watson Wyatt is predicting a "sustained fall" in UK pension fund deficits in 2007 after FTSE 100 companies reported a £20bn (€29.7) drop over 2006.

However, accountancy firm Deloitte claims pressure to manage longevity risk in 2007 could see pension funds coming under pressure to abandon liability-driven investing for higher-risk assets.

Deficits for FTSE 100 companies fell from £60.4bn at the end of 2005 to £39.9bn at the end of 2006 - the largest annual deficit reduction since 2002.  In December alone deficits fell by more than £14.1bn.

Watson Wyatt senior consultant Stephen Yeo attributed the December figure to rising equity markets, which in the UK have risen by around 17% over the past year, and AA-rated bond yields.

He predicted that the downward trend would continue, with forecast contributions of £5bn in 2007 driven by pension funds' desire to reduce the requirement to pay levies to the Pension Protection Fund (PPF). However, he added that smaller pension funds are "less well placed" to make contributions and could see their PPF levies quadruple.

"Overall, we expect further good news in 2007 but we couldn't expect news as good as we had this year," he said.

Separate figures released by Deloitte put the year-end deficit at £38bn, down from £75bn at the start of 2006. However, the accountancy firm forecast that regulatory pressure on pension funds to reconsider longevity risk could add £20bn to their pension deficits in 2007.

In the meantime, Deloitte senior partner David Robbins predicted increased pressure on pension funds to reassess longevity risk.

"The accounting side of the business is seeing it first, with auditors putting pressure on companies to make sure their longevity assumptions are correct and prudent," said Robbins. "The evidence is that many haven't. They will need to reappraise."

The result will be larger pension funds moving away from liability-driven investing (LDI) - "the big buzzword in the past few years" - towards higher-risk investments in equities and emerging asset classes such as hedge funds and private equity.

"LDI will still be attractive to companies whose earnings are low compared to their pension contributions, but companies with cash on their hands and stronger employer covenants will feel pension funds should take some of the risk," he said.

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