David Prosser's Outlook: The pension crisis is merely in hiding

Is the pensions crisis over? As recently as two years ago, the huge holes in Britain's biggest final salary pension schemes threatened to wreck the financial health of many of our biggest companies. Yet today, Lane, Clark & Peacock's annual survey of pension fund finances shows these schemes are now back in the black - with an aggregate surplus of £12bn for the constituents of the FTSE 100 Index.

The figures certainly look robust. Last year, the same survey put the combined FTSE 100 pension scheme deficit at £36bn, so the recovery is a £50bn turnaround story. Buoyant investment markets - notwithstanding the volatility of the past few weeks - have delivered most of the improvement, with investment returns producing a £30bn bonus for schemes and higher bond yields contributing an additional windfall of £10bn.

It makes you wonder why everyone became so hysterical about pension schemes' trouble. Gordon Brown's £5bn-a-year "tax raid" on occupational pensions for a while even threatened his chances of becoming prime minister. Company after company has closed down its final salary pension scheme, either to new entrants or completely.

The short answer to that question is that while today's survey makes healthy reading for pension scheme managers and company finance directors, the figures are merely a snapshot of funding positions at one point last month. The assets invested in the large occupational pension funds are so large that the figures could have varied enormously on a different day. And many of the factors underlying the pensions crisis remain.

LC&P puts the combined pension assets of FTSE 100 companies' final salary schemes at £351bn, with liabilities totalling £339m. Despite the recent trend for asset mixes more closely allied to schemes' liability profiles, just under two-thirds of pension fund money remains invested in volatile equities.

Indeed, had the survey been conducted last week, rather than last month, that £12bn surplus would have been much lower, given the mini-correction suffered by global stock markets since the middle of July. LC&P calculates there is a one in 10 chance of the figure fluctuating upwards or downwards by £80bn over the next 12 months.

Still, now that the bear market for equities of 2000 to 2003, the worst of the pensions crisis is behind us, surely?

Sadly not. The two biggest problems for pension schemes in recent times have little connection to the vagaries of global investment markets (or, by the way, Mr Brown's tax raid, which may have been unhelpful but has had little impact in the context of larger worries).

Changes to the law in 2003, which required schemes to make more generous annual increases to pensions in payment, have proved particularly disastrous. In some cases, pension schemes costs have risen by 50 per cent because of this issue alone.

This is one reason why finance directors are now required to authorise substantially larger pension contributions from employers - LC&P says they paid in almost 20 per cent more in 2006 than in 2005.

Challenge number two - higher life expectancies - is even more fundamental. It's not just that people now live longer - and thus draw guaranteed final salary pensions for an extended period - but also that scheme advisers keep getting their analysis of mortality trends wrong.

LC&P says today that its figure for the aggregate surplus would be higher were it not for the fact most schemes have changed their assumptions about members' life expectancies over the past year, raising liabilities.

Unfortunately, these assumptions still under-estimate the scale of the problem. Only last month, the Institute of Actuaries in England and its Scottish counterpart, the Faculty of Actuaries, warned pension schemes that life expectancy assumptions need to be revised upwards once again. And each additional year of life expectancy assumed adds £12bn to the combined liabilities of the large final salary schemes.

Clearly, some funds face larger difficulties than others. Several large companies, including British Airways, HSBC and Lloyds TSB, are still in the red on pensions. Others are only in the black following very large one-off payments from sponsoring employers. There are a few companies, meanwhile, that look much more healthy.

Overall though, final pension schemes are not yet out of the woods. More companies will seek to reduce liabilities by closing plans. Costs will rise further. And if LC&P picks the wrong day to publish its annual snapshot next year, we'll be firmly back in crisis territory.

Why S&N owes C&C a pint

Scottish & Newcastle has much to thank its Irish rival C&C for. For years, S&N's rather naff advertising campaigns for Strongbow produced variable results, with the brand struggling to overcome cider's image problem. Then along came C&C and its efforts to brand Magners as a trendy brew for bright young things - including the never-before-tapped female market - and cider made a breakthrough.

Now S&N is reaping the rewards. It said yesterday that cider sales were up almost 25 per cent in the first half of the year. And not only are sales booming for its Bulmer Original - S&N's direct competitor to Magners in the "over ice" market - but Strongbow has also benefited from cider's makeover.

To add insult to injury - from the Irish company's perspective - S&N has managed to post healthy sales increases despite the rotten weather that has so far washed out a good chunk of the British summer.

By contrast, C&C itself was last week forced to issue its second profits warning in two weeks, following a dramatic fall in volumes during July.

C&C naturally blamed the awful weather for its difficulties. But yesterday's figures from S&N suggest that the rainclouds, aren't the only reason Magners is struggling to sustain the stellar growth it produced in 2005 and 2006.

What C&C has discovered - like so many businesses before it - is that there is no copyright on good ideas. S&N watched the rise of Magners with increasing envy and then decided to imitate it. Bulmer rode on the coat-tails of Magners for a while, but S&N's superior marketing and distribution power has enabled its product to capture a decent market share - around 26 per cent from a standing start.

Publicly, S&N says the fact that two companies are now investing heavily in the rebranding of cider can only be healthy for the sector. Unfortunately, the renewed competition in the cider market is proving more healthy for some than others.

The fundamental question for both companies is whether the vogue for cider is a passing fad or a sustainable trend. Drinks giant Diageo, which has given this market a miss, is firmly in the former camp and has been pretty sniffy about the prospects for the drink longer term.

That may yet prove wishful thinking. Market analyst AC Nielsen says sales of cider rose 26 per cent over the year to July 2007, a period during which the beer market was pretty much flat. And with sales still accounting for only 8 per cent of the UK's total alcoholic drinks market, there's plenty of territory still to push for.

It helps that cider has certain advantages over drinks such as lager - apples are sourced locally, which plays well to eco-conscious drinkers worried about food miles. S&N also claims cider is a more flexible drink than beer, with people happy to quaff the stuff in almost as many circumstances as wine.

Assuming cider's negative image problems are behind it, the future is rosy. Still, you can't help feeling a little sorry for C&C. After several years of serious partying with Magners, Bulmer has crashed the party - now the Irish company must put its hangover to one side and work out how to call in the bouncers.

d.prosser@independent.co.uk