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3 January, 2007 - 13:54 By Staff Reporter

Pension deficits decline in 2006

Pension deficits of the UK’s top 100 firms fell by almost half in 2006, according to new figures from business advisory firm Deloitte.

Actuaries at the firm said the total deficit for final salary pension plans has shrunk from £75 billion at the start of the year to its current level of £38 billion due to healthy stock market returns.

Pension scheme assets have also benefited from double-digit investment growth in share prices, which is important because most pension schemes invest a significant proportion (60 per cent on average) of their assets in the stock market. UK shares increased in value by 17 per cent during 2006. Higher levels of contributions from employers in recent years have also helped. The FTSE 100 currently pay contributions of around £15 billion every year to their final salary plans.

For 2007, mortality will be the biggest issue for companies to grapple with, particularly with the increasing pressure from regulators, auditors and their shareholders to reconsider their allowance for increasing life expectancy. Full allowance for increasing life expectancies could add up to £20 billion to pension deficits.

Andrew Mewis, head of Deloitte’s pensions division said: “Back in the 1950s when many pension schemes were set up, average life expectancy was 70. Nowadays, pensioner life expectancy could be more like 85 years for some pension plans. Pension plans will be paying out benefits for far longer than was once expected.”

According to Deloitte’s analysis, there are two key investment strategies at opposite ends of the spectrum that pension plans will consider during 2007. On the one hand, many plans are looking at Liability Driven Investment (LDI) where the assets are matched to liabilities to reduce the volatility of pension liabilities. This strategy forfeits possible future equity out-performance in return for reducing the risk from possible stock market crashes. On the other hand, there are also increasing numbers of pension plans looking to their equity investments and other return-seeking asset classes.

Mewis said: “We expect to see a move to equities and emerging asset classes during the year. LDI has been the buzzword for 2006 and involves stabilising the investment risk by matching assets to the liabilities. However, a number of large pension schemes have recently made a move to private equity and hedge fund investments as they seek higher reward for the risks they are taking.”


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