October 16, 2007 / 7:12 AM / 12 years ago

Pension deficits cushioned by stock rebound

LONDON (Reuters) - Pension deficits at leading companies rose by 1 billion pounds in the third quarter as stock markets tumbled, but the damage could have been far worse if shares had not rebounded in September, data showed on Monday.

Pension deficits at leading companies rose by 1 billion pounds in the third quarter as stock markets tumbled, but the damage could have been far worse if shares had not rebounded in September, data showed on Monday. REUTERS

Consultants Mercer said both FTSE 100 and FTSE 350 companies saw their pension scheme deficits grow, to 6 billion pounds from 5 billion pounds and 9 billion pounds from 8 billion pounds, respectively.

The deficits would have been worse, however, had the reporting period not included September when stocks rebounded significantly as credit crisis fears were put on a back burner.

The FTSE 100 deficit was as high as 30 billion pounds in mid-August, as the value of equities held by pension funds lurched downwards, hit by a credit crunch triggered by the U.S. subprime mortgage crisis.

“There would have been a substantial impact on company valuations if FTSE 100 companies had reported in mid-August. The data highlights the volatility of accounting deficits,” said John Hawkins, principal in Mercer’s financial strategy group.

But, in overall terms, the Mercer data shows the state of pension funds is relatively strong. The deficit of 9 billion translates into a small deficit of assets when compared with overall pension liabilities of 438 billion pounds in the schemes that comprise the survey.

The aggregate funding level of the FTSE 350 pension schemes was 98 percent at the end of the third quarter, the same as at the end of the second quarter. FTSE 100 schemes had a funding level of 98 percent, down from 99 percent.

Generally favourable stock and bond markets over the past year, along with record company cash injections to address major deficits in some schemes, have helped pushed occupational pension schemes closer towards the black.

A recent survey by Aon Consulting, another pension consultant, showed that the largest 200 UK defined-benefit pension schemes — whose sponsors are not all FTSE 350 firms — swung to an aggregate surplus of 5 billion pounds at the end of September, from a deficit of 10 billion at the end of August.

Oil giant Royal Dutch Shell, which has one of the strongest UK pension funds, said earlier this month that it was taking a temporary “holiday” in its pension contributions because its scheme was so heavily in surplus.

But the market volatility of the summer highlighted the risk facing some company schemes that are heavily exposed to the equity markets, Mercer said, and suggested pension funds could have done better by switching from equities to liability-matching bonds.

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