May 23, 2007 / 7:12 AM / in 12 years

Up to half FTSE 100 pension funds in surplus

LONDON (Reuters) - Up to half of the pension schemes of FTSE 100 companies are currently in surplus, pensions consultants say, although inaccurate longevity assumptions could mean the situation is not as rosy as such figures suggest.

“It’s moving from people talking about deficits all the time to talking about surpluses. The new concern is around what to do with the surpluses,” Alex Waite, partner at pensions consultant Lane, Clark & Peacock, said in a recent interview.

Waite estimates that 35 of the FTSE 100's .FTSE 90-plus defined benefit schemes are in surplus as of May 1, up from only a handful last year. His projections take into account factors such as equity and bond returns and inflation, and he said the figure could rise to half of schemes in the near future.

“If we had a second four months of the year the same as the first four months, I suspect we’d be almost there,” he said.

Pension deficits, treated like debt on balance sheets, have been a headache for firms in recent years, thanks to a bear market at the start of this decade and rising life expectancy, and many firms have had to divert money into their schemes.

However, Waite said the recent improvement had been caused by gains in the stock market, which has enjoyed a four-year bull market, higher real bond yields, which are used to measure pension liabilities, and better management of schemes.

Meanwhile, Deloitte & Touche told Reuters that 45 of the FTSE 100’s schemes are in surplus, based on its projections.

Last week telecoms company BT Group (BT.L) said its pension fund, long deep in the red, had a surplus of around 1 billion pounds at the end of April.

LONGEVITY

However, some experts believe the mortality assumptions used by some funds are out-of-date. Many schemes do not reveal their assumptions.

“Using realistic longevity assumptions means smaller surpluses in fewer companies. If longevity has been underestimated by one or two years, that adds up to 8 percent to liabilities and deficits,” independent consultant John Ralfe told Reuters.

In December, Pension Capital Strategies told Reuters that longevity risk — the chance that a pension fund may run short of money because people live longer — was probably the biggest challenge facing Britain’s corporate pensions in 2007.

David Robbins, pensions partner at Deloitte, whose projections, like Waite’s, are based on pension schemes’ existing longevity assumptions, said the issue was overstated.

“Maybe a handful would be in deficit if improved mortality assumptions were used .... (But) investment performance still remains the biggest factor,” he said.

Waite said longevity assumptions in aggregate were likely to be too low, but said firms were set to address this.

“What I think we will see happening is schemes spilling over into surplus ... and using some of this to de-risk their investment portfolio and some of the surplus will disappear as they reassess their expectations on mortality,” he said.

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