Pensions set to move into surplus in 3 years

LONDON (Reuters) - Some employers are in danger of paying too much into their pension schemes, according to Aon Consulting, which estimates the country's 200 biggest schemes are likely to show an aggregate surplus by 2010.

According to Aon's research, the combined pension deficit total under current FRS 17 accounting rules across the 200 biggest schemes stood at 26 billion pounds at the end of March.

However, Aon says there is a 61 percent chance these schemes will have a combined surplus within three years, and an 84 percent chance of a surplus within ten years.

"It's a combination of markets generally improving and the fact companies have put a stack of money into schemes ... If equities return maybe 7 percent, versus an assumed 5 percent on bonds, things will sort themselves out," Aon's Head of Employer Advice Paul McGlone told Reuters.

Yields of AA-rated sterling bonds are used under FRS 17 to calculate the pension fund liabilities. When yields -- which move in the opposite direction to bond prices -- fall, they push up the value of liabilities, increasing deficits, and vice versa if yields rise.

"As schemes mature, trustees may target a higher level of funding than is really required and many organisations could find themselves in a situation where they have paid pension contributions that were actually unnecessary, but they cannot recover or recognise them," McGlone said.

He said that because many schemes are closed to new members, there are fewer opportunities for firms to take contribution 'holidays', where they skip payments for a short period of time.

Pension trustees and the Pensions Regulator are also less likely to allow such 'holidays' after seeing large deficits after the bear market at the start of this decade, he said.

Pension deficits, treated like debt on balance sheets, have become a headache for companies forced to divert billions of pounds into them. Some firms have shut pension plans down or moved staff to cheaper schemes.