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The Independent: Pension funds back in surplus after five-year stint in the red

By James Daley, Personal Finance Editor
Published: 08 August 2007

The pension funds of Britain’s largest companies have seen a dramatic turnaround in their fortunes over the last year, with the schemes of the FTSE 100 combined registering a net surplus for the first time in five years.

The annual Accounting for Pensions survey, published today by actuarial consultancy Lane Clark & Peacock, shows the combined pension schemes of FTSE 100 companies now have a net surplus of some £12bn – up from a deficit of £36bn this time last year.

Although strong investment returns were the main driver behind the schemes’ change in fortunes, FTSE 100 finance directors also allocated a record £13.4bn to their companies’ pension funds, up 19 per cent on the previous year.

The survey showed many schemes were now registering surpluses in spite of having also updated their investment return and life expectancy assumptions, which will have increased the schemes’ estimated liabilities. However, LCP said in many cases, firms had not increased their longevity expectations by enough – with life expectancy rates continuing to increase.

“It is encouraging to see UK Pension Schemes of FTSE 100 companies report a surplus after so many years in the red,” said Bob Scott, a partner at LCP. “However, the surplus may not survive once companies reflect the latest mortality projections in their accounts. Also, companies whose pension schemes remain heavily invested in equities run material investment risk and the fragility of the surplus was highlighted by recent stock market falls. UK pension schemes are not out of the woods yet.”

Although schemes with the biggest deficits all made big improvements over the year, there were still 11 companies with deficits of more than £1bn. BAE Systems held on to the title of biggest FTSE 100 pension scheme deficit, clocking in at £3.2bn. However, this was down from more than £5.3bn last year, after the group paid in more than £1bn in additional contributions. BT, HSBC and Lloyds TSB also all have deficits of more than £2bn.

Relative to its market capitalisation, British Airways has the biggest pension scheme problem, with a deficit of £1.5bn. Its total scheme liabilities are four-and-a-half times larger than its market value.

Royal Dutch Shell has the best-funded pension in the index, with a surplus of more than £3.5bn. Its rival BP had the most aggressive investment strategy, with 79 per cent of the fund in equities.

The LCP report also broadened its scope to take in 80 of the largest schemes outside the UK. Banco Santander Central Hispano, which owns Abbey in the UK, had the largest deficit – hitting almost £10bn.

“Companies are beginning to breathe the first sighs of relief after a period of sustained deficit headaches,” continued Mr Scott. “But having a surplus brings its own issues and companies need to decide what steps to take to protect their fragile surpluses.

“LCP urges companies to take a keen interest in their pension scheme’s investment strategy and move quickly to consider all the options available…” and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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