Britain's top 100 listed companies have seen their pensions' black hole widen to £75bn from £6bn at the start of the year, despite strong stock markets and higher contributions from employers.
The combined deficit of FTSE 100 company pension funds has widened mainly because a rise in the value of pension scheme assets over the year has been offset by the impact of falling interest rates, according to a report by the consultants Deloitte & Touche.
David Robbins, a consulting partner at Deloitte, said although the value of pension scheme assets had increased by about 15 per cent, the gains were not big enough to counter the effects of lower interest rates. "We estimate the stock market would need to rise immediately by a further 30 per cent to eliminate the UK's pension deficits," he said.
Mr Robbins observed that most companies had not yet fully allowed for rising longevity. "Most companies have got halfway from where they are to where they need to be," he said, adding that factoring in longer life expectancy fully would add another £10bn to £15bn to total pension fund liabilities.
He also noted that finance directors had finally begun to accept they could not merely rely on strong stock markets to fix their pension fund deficits, and that they must increase contributions and find ways of mitigating the risks from falling interest rates. In particular, companies have been looking at using derivatives to limit the risk of liabilities rising when interest rates fall.
Mr Robbins said: "Companies have finally said 'This is our deficit'. 2005 is the year in which the UK's finance directors have finally accepted that pension deficits are company debt." He predicted the FTSE 100 combined shortfall would fall back below £65bn by the end of next year, helped by rising equity markets and higher contributions.
This month, the support services group Rentokil became the first FTSE company to propose closing its final-salary pension scheme to current members, leading experts to predict other large companies could do the same to ease the burden of growing deficits.
Companies are coming under increasing pressure to address their pension deficits from the new Pensions Regulator, which was established to demand faster funding of deficits. The new Pension Protection Fund requires companies to pay a levy depending on the size of their deficit and their financial strength.Reuse content