FTSE 100 pensions schemes record £41bn deficit

The net deficit on the UK's top 100 firms' pension schemes has hit £41 billion, down from a £12 billion surplus a year ago.

Pension funds have been hit by a heady cocktail of the credit crunch, equity market volatility and rises in expected inflation, the Lane Clark & Peacock (LCP) annual Accounting for Pensions report reveals.

In response to recent falls in the stock markets, pension funds have been looking away from the markets and aiming to reduce risk – with equity investments falling from 59 per cent to 53 per cent of funds in the last year.

Bob Scott, LCP partner, said: "No sooner have companies breathed a sigh of relief about returning to surplus but they are back to multi-billion pound deficits.

"With a possible recession looming and the threat of further regulatory intervention, the outlook for continuing defined benefit provision seems rather bleak."

He added the brief period of surpluses had led to some companies choosing to spend their surpluses on various forms of 'de-risking activity' including buy-outs, purchasing financial swaps and reducing their exposure to equities.

Increases in life expectancies are also putting a further strain on firms - with a one year rise in life expectancy causing a three per cent rise in liabilities for firms.

However, firms are taking varying views on how long their workers will live – ranging from 82 to 89 – suggesting either their calculations differ or certain firms promote longevity as an added employee benefit.

The health of UK pension schemes is also being undermined by accounting rules, LCP found.

The IAS19 accounting standard, brought in to provide clearer comparisons of firms' health, has resulted in pension liabilities to be valued corporate bond yields - which have risen to unprecedented levels compared to gilts.

As such pension deficits would be as high as £91 billion, LCP analysis claims, if the effects of the credit crunch were not included in liability calculations.