Company pension funds dip into red

LONDON (Reuters) - UK blue-chip company pension funds slipped back into the red in June, due to falling share markets and higher inflation expectations, pension consulting firm Watson Wyatt said on Tuesday.

The aggregate financial strength of FTSE 100 pension funds fell from a surplus of 23 billion pounds at the end of May to a deficit of 8 billion by the end of June, Watson Wyatt said.

The FTSE All Share Index, in which most pension funds invest the bulk of their assets, lost nearly 10 percent during June.

The situation has been compounded by rising inflation expectations, which make the pension guarantees offered by firms to members of defined benefit pension schemes more costly.

Falling asset values made a 20 billion pound dent in pension funds during June, while higher inflation expectations added 18 billion pounds to pension liabilities, Watson Wyatt said.

The effect was partly offset by higher corporate bond yields, which have the effect of reducing pension liabilities, but pension liabilities still rose by a net 11 billion pounds in June.

"Companies with defined benefit pensions have offered their staff protection against prices rising in future but have limited protection against this themselves," said Rashpal Bhabra, head of corporate consulting at Watson Wyatt.

The fall in equity markets and gloomier economic climate come at a bad time for many finance directors, who are preparing their interim statements. "Some who could have hoped to report a pension surplus a few weeks ago will have to report a deficit instead," said Bhabra.

Another pension consulting firm Aon said on Tuesday that pension trustees should conduct more frequent and robust monitoring of the health of the company backing their defined-benefit pension scheme as the economic outlook deteriorates.