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The total deficit of FTSE 100 company pension schemes has widened to £75bn from £65bn at the start of this year, in spite of strong equity markets and
higher contributions from employers.

The shortfall has widened largely because the increase in the value of pension scheme assets has been offset by falling interest rates, according to a new analysis by consultants Deloitte & Touche.

David Robbins, consulting partner, said that although the market value of pension scheme assets had increased generally by about 15 per cent, the gains were insufficient to offset the effects of falling 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,” said Mr Robbins.

He added that rising longevity was taking a toll on pension scheme liabilities. Although many companies had increased the assumptions they used for the number of years a retiree will live, these were still probably not realistic.

“We’re still in the position where most companies have not yet fully allowed for rising
longevity,” said Mr Robbins.

“Most companies have got half-way from where they are to where they need to be,” he said, adding that when companies factored longevity in fully, it would add a further £10bn-£15bn to total company pension scheme liabilities.

However, Mr Robbins noted that finance directors had finally begun to accept that strong equity markets alone would not fix their ailing pension schemes, and that they must both increase contributions and find ways of reducing the risks that interest rates would fall further.

“Companies have finally said ‘this is our deficit’,” he said. “2005 is the year in which finance directors have finally accepted that pension deficits are company debt.”

Companies have been making increased contributions to their pension schemes during the year and Mr Robbins said the Deloitte calculation might not include all the increased spending.

In addition, companies have been looking for ways to reduce the effect of falling interest rates on their liabilities, and in particular are looking at using derivatives to limit the risk that liabilities will rise when interest rates fall. Pension schemes such as that of WH Smith and, to a limited extent, Schroders had switched to so-called liability-driven investment strategies to address this risk, said Mr Robbins.

Mr Robbins said that heightened awareness of the need for companies to address their deficits in 2005 was also encouraged by the advent of the new Pensions Regulator, which has the power to require companies to cover their deficits more

Also, the new Pension Protection Fund imposes penalties on companies with schemes that are significantly underfunded, particularly those with lower credit ratings.

Deloitte is predicting that by the end of 2006, the aggregate deficit of the FTSE 100 companies will again fall below £65bn because of higher contributions and equity market gains.

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