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FTSE 100 pension deficits plummet in 2010

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The combined pension deficits of Britain’s biggest companies plummeted by almost two thirds in the past year according to the 18th annual Accounting for Pensions report by LCP, a leading firm of consulting actuaries. The report, published today, reveals that the aggregate FTSE 100 pension deficit now stands at GBP19bn, down from GBP51bn the previous year.

Key factors behind the lower deficit included the change in the inflation measure from RPI to CPI, continued high contributions from employers and stable economic conditions.

The shift to CPI as the pension indexation measure has created a windfall for some companies who have seen liabilities reduce dramatically. BT has seen a huge GBP3.5bn decrease in liabilities in their 2011 accounts due to this change.

Bob Scott, senior partner at LCP, says: ‘The gain for companies comes at a cost for many employees in the form of reduced pensions.  The change to CPI is entirely dependent on the wording of each scheme’s rules and we’re seeing a ‘small print lottery’ under which a 45 year-old deferred pensioner in one scheme is unaffected yet a similar member in another scheme could stand to lose roughly a quarter of the value of their pension.’

In the wake of a record year for contributions in 2009, pension scheme funding continued apace in 2010 albeit with GBP11bn of the GBP17bn paid into FTSE 100 schemes going towards reducing deficits rather than providing additional benefits for employees. HSBC paid GBP2.1bn into its scheme in 2010, the largest contribution made this year and three and a half times the amount they paid in 2009.

The reduction in the deficit also reflects positive asset returns over the year (at the same time as more stable corporate bond yields – and hence liability valuations – than in the previous two years.)

Scott adds: ‘The last 12 months have been a relatively benign period for pension schemes but it would be a mistake to think that the pensions challenge has gone away. FTSE 100 companies still have about GBP400bn of UK IAS19 pension liabilities and the challenge remains not only to ensure that members receive what they were promised but to find ways to provide today’s young employees with decent pensions as final salary schemes decline.’

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