Market rally slashes £5bn from pension deficits of top 100 firms

The combined pension deficit among companies in the FTSE 100 index has fallen by more than 13.5 per cent to about £37bn over the past year, helped by a record level of employer contributions and a sustained rally in UK equity markets.

According to a report published today by the actuaries Lane Clark & Peacock (LCP) the total deficit among FTSE 100 companies fell by £5bn over the year, as more than 75 per cent of employers elected to increase contributions to their ailing schemes.

A handful of companies - including Alliance & Leicester and Scottish & Newcastle - made substantial one-off payments to help reduce their deficits during the year. Royal Bank of Scotland and BT - which boast two of the UK's largest pension fund deficits - both injected more than £1bn into their funds.

In spite of the improving position in the UK, six FTSE 100 companies - BAE Systems, British Airways, BT, ICI, Royal & SunAlliance and Rolls-Royce - have deficits in excess of 30 per cent of their market value.

Furthermore, while the overall deficit of the FTSE 100 decreased, 44 companies in the index saw their deficits increase over the year. While many of these came as a result of updating actuarial assessments of the funds for the first time in three years, other funds were hit by worsening bond performance. Only three companies in the FTSE 100 - Associated British Foods, Johnson Matthey and Old Mutual - do not have a pension fund deficit.

Across Europe, the picture was mixed, with the combined deficit across the EU's 50 largest blue-chip companies - as represented by the Dow Jones Stoxx 50 index - staying put at about €116bn (£80bn).

Although companies in the UK saw their deficits reduce by 9 per cent on average, Switzerland saw its total deficit rise by almost 80 per cent - driven largely by a recalculation of UBS's fund position. The Netherlands saw a 33 per cent rise in its combined deficit.

Pension funds in the UK continued their slow shift from equities to bonds over the year, with an average of 57 per cent invested in equities this year compared with 59 per cent a year ago. The amount invested in bonds also decreased as bond yields continued to deteriorate.

Commenting on the overall reduction in the FTSE 100 combined deficits, Bob Scott, a partner at LCP, said: "A lot of this has to do with legislation and increased disclosure. With companies having to put deficits on to their balance sheet, that has highlighted the position... Meanwhile, the Pensions Act has given more power to trustees. All of these things mean companies are having to address their deficits."

Stephen Yeo, a partner at Watson Wyatt, said the results highlight that many of the worst deficits are in smaller and medium-sized companies. "The evidence is that where a pension scheme is backed by a large employer, pensions are usually more secure," he said.