Black hole in pension funds rises to £55bn

The collapse in the value of company pension schemes was underlined yesterday when a survey showed the black hole in funds held by FTSE 100 companies more than doubled to £55bn in the past 12 months from £25bn.

Actuaries Lane Clark & Peacock said in its annual survey that for every £100 of liability the schemes held, FTSE 100 companies held on average only £80 of assets.

The study looks at pension funds measured on the FRS17 accounting method, which requires companies to adjust valuations on their pension assets according to the most recent movement in equity values.

Lane Clark & Peacock found that of the 90 members of the FTSE with defined benefit schemes, 77 now have a deficit in their funds. Some companies have swung dramatically from surpluses to deficits. Friends Provident, the insurer, had the highest ratio of pension scheme assets in last year's survey, holding funds worth 135 per cent of its liabilities.

Over the year the ratio has tumbled by 40 per cent to 95 per cent, Lane Clark & Peacock said. The largest fall in the value of a fund was at BP, which saw its fund deteriorate by nearly £5bn in the course of 12 months from a surplus of £1.5bn to a deficit of £3.4bn.

"Without significant additional contributions towards eliminating their FRS17 deficits, many companies will need their pension schemes to continue to invest in risky investment classes, such as equities, in the hope of achieving investment returns in excess of the interest costs which are accruing on their FRS17 liabilities," the report warned. It also highlighted that companies vary widely in the projections they are using for future returns on the equities in their funds.

It is an issue which is increasingly being seen by analysts and City investors a material factor in assessing the overall attractiveness of companies. If companies' real returns fall short of their projections, they may be able to close funds to new members or slash retirement benefits, but will probably also have to increase the amount of capital they are ploughing into the fund. Chris Tavener, a partner at Lane Clark & Peacock, said: "We have seen a range of expected returns on equity from 5.1 per cent at P&O Princess Cruises to Reed Elsevier with 9 per cent"