Worst drop in decade wipes £875bn off pension funds

The balance sheets of pension funds around the world lost one-fifth of their value last year, their worst drop in 10 years, according to the actuaries Watson Wyatt.

The firm, which advises the Government on its pension policy, said pension funds saw their assets decline by $1,400bn (£875bn) in 2002, or 12 per cent, due to adverse stock market conditions.

The company pointed out that the real loss was higher, standing at 20 per cent, because pension fund liabilities have also increased due to the unprecedented problem in 2002 of bond yields falling at the same time as the continued decline in equities.

Roger Urwin, the head of investment at Watson Wyatt, said: "This is the third consecutive year of losses and, to make matters worse, liability growth has accelerated amid falling bond yields."

Mr Urwin added: "Taking into consideration the increase in values to liabilities, global pension fund balance sheets worsened by a figure over 20 per cent."

Watson Wyatt, which has conducted its annual pension fund survey for the past 10 years, said plunging equity markets have sliced $2,800bn from the value of global pension funds since 1999.

The company pointed out that the third year of decline in the stock market created such a large loss for pension funds that they have, in effect, seen the benefit from the bull-run in asset values in 1997, 1998 and 1999 entirely wiped out.

Mr Urwin signalled the continued deterioration would be likely to impair corporate profits. "Many funds worldwide are in a difficult predicament. Where deficiencies exist in their balance sheets they will be pressed either through statutory force or by industry pressure to put their funds into better shape," Mr Urwin said.

The gloomy findings are likely to make companies with sizeable pension schemes keener to switch out of defined-benefit pensions, where the employer is exposed to the vagaries of the stock market because it has to pay fixed sums to pension fund members when their contracts mature. There has already been an accelerating trend of companies moving towards defined-contribution pensions, where the employee bears the risk and receives whatever sum his or her investment is worth after being exposed to the stock market.

Companies that have already closed their defined-benefit pension schemes to new members include British Airways, J Sainsbury, Iceland, Marks & Spencer and Abbey National. Last year more than 80 such schemes were closed to new members.

The pain of sickly pension funds is already evident in the results and trading statements of a broad range of companies. BT has said it will pay an additional £200m annually to plug a gap between its assets and liabilities which it estimates as £1.6bn but analysts say could be as high as £4bn.

Last week Ford Motor said its fund had a shortfall of $7.3bn and it would inject $1bn into the fund while pension costs would probably increase by $460m this year. General Motors said its pensions costs would triple to $3bn this year as it plugs a $19.3bn shortfall and DaimlerChrysler said pension costs will rise by €700m (£461m) in 2003.