The pension scheme deficits of FTSE 350 companies dropped by 29 per cent in 2006 according to research by Mercer Human Resource Consulting.
Projections for 2006 year-end accounts indicate that deficits fell from £86 billion in 2005 to £61 billion last year.
But longer-term trend analysis reveals the drop is partly a reversal of the upswing in 2006 with aggregate deficits only a fifth below the levels at the end of 2002, with investment and longevity risks remaining at similar levels to those of four years ago.
Tim Keogh, worldwide partner at Mercer, commented: “Rising funding levels are good news for pension scheme members, but the underlying longevity and investment risks remain significant issues for sponsoring employers. There has been little change in relative risk levels over the last four years.”
Mercer’s research shows that over the last four years companies have primarily tried to manage their pension risk by reducing the level of future benefits, either through cutting existing members’ benefits or closing schemes to new entrants.
Although this action reduces future risks, it does not diminish the legacy exposure, which mainly comes from a scheme’s investment strategy and the uncertainty surrounding member longevity.
Mercer’s survey also looked at trends across Europe. Pension funding conditions were even more favourable in the Euro-zone than the UK – the combined underfunding of the top 50 Euro-zone companies, which in aggregate are worth roughly the same as the FTSE350 companies, declined by £34 billion from £113 billion to £79 billion.
