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Top UK companies’ pension deficit “doubles”

UK – The combined pension deficit of the UK’s top companies has more than doubled, to 55 billion pounds (78 billion euros), says actuaries Lane Clark & Peacock.

The combined deficit, based on the FRS17 accounting standard, has grown from 25 billion pounds a year ago.

LCP partner Bob Scott said companies had faced a “double whammy” of lower equities prices and higher liabilities. The firm estimates that the benchmark FTSE100 index would have to rise to above 6,000 to wipe out the combined deficits.

And LCP sees the shortfall as a “strain on profits”, with companies such as oil giant BP topping up their pension schemes.

“Not all companies are in the fortunate position of BP – having two billion dollars lying around to put into their pension fund,” Scott said.

But Scott suggested that companies topping up their pension funds with extra contributions means that there would be more cash available in the ‘system’ for investment.

“The estimated deficit equates to six percent of the total market capitalisation of the FTSE 100,” the firm said. LCP based its analysis on the pension cost disclosures in the annual reports of FTSE 100 member companies.

LCP drew attention to the differences between companies’ expected future return on investments – a requirement under FRS17. “A company’s profits are higher under FRS17 if its directors are more optimistic and assume a higher return,” LCP says.

It says most companies disclosed an expected return on equities of around eight percent a year, with a range between 5.1% and nine percent.

“We estimate that pre-tax profits calculated under FRS17 could potentially increase by over one billion pounds if every FTSE100 company increased their expected rate of return on equities for their UK schemes by one percent per annum.”

The opposition Conservative party blamed the government for the pensions shortfall. “This is yet more evidence of how serious the pensions crisis has become,” said pensions spokesman David Willetts. “Each new estimate about the pensions black hole shows the effects of chancellor Gordon Brown's five billion-pound a year raid on pensions since 1997.”

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