August 2, 2007 / 7:13 AM / 12 years ago

KPMG warns of asset trap when clearing deficits

LONDON (Citywire) - Around 60 percent of FTSE 100 pension schemes could clear their deficits within a year following strong growth in equity markets, rising bond yields and increased contributions, according to KPMG.

But the professional services firm has warned that injecting cash to clear this deficit could lead to company assets being trapped as pensions surpluses.

Its Pensions Repayment Monitor reported that if companies able to pay off their deficits in 2006 had done so, their schemes would now have a combined surplus of 13 billion pounds, some 10 percent of their liability value.

Accessing surplus funds is difficult as trustees prefer to hold onto excess funds to buffer against future market downturns or so they can de-risk the investments.

Companies are more likely to cover deficits using secure assets such as property that are not subject to claims by creditors, assets that cannot be seized in bankruptcy proceedings and assets held in trust.

Mike Smedley, partner in the pensions team at KPMG, said: “For companies with healthy cashflows and relatively small deficits, the chances are that their cash will end up locked away in a trapped surplus.

“And for companies which don’t have the cash available, diverting funds from commercial activities to clear pension deficits could jeopardise the business.”

But while the funding position across most FTSE 100 company pensions has improved, 26 percent of these schemes will still need at least three years to repay pension deficits and 17 percent are unlikely to be able to do so within a realistic time frame.

c Citywire Financial Publishers Ltd 2007.

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