UK pensions surplus 'remains fragile'

PENSION schemes belonging to the UK's biggest companies could soon slip back into deficit despite being back in the black for the first time in five years, a new report has revealed.

Respected City consulting actuaries Lane Clark & Peacock said the pension surplus remains in a fragile state - and could suffer once life expectancy is taken into account.

LCP said in its 14th annual Accounting for Pensions report that the defined benefit schemes of FTSE 100 companies collectively had a surplus of 12 billion in mid-July.

Favourable investment returns - helped by a 20 per cent rise in the FTSE 100 over the previous 12 months - had boosted pensions coffers by around 30bn over the year and higher bond yields added a further 10bn. But LCP warned the position could be short-lived once companies update their life expectancy assumptions.

Company contributions also rose, hitting a record of 13.4bn during 2006 - 19 per cent higher than the amount paid in during the previous year.

The report said that even companies with updated estimates, which tended to increase the amount of time scheme members were expected to live by around 1.5 years, may still face problems as predictions for life expectancy continue to soar.

Each additional year of life expectancy adds around 12bn to pension liabilities.

Bob Scott, partner at LCP

said: "It is encouraging to see UK pension schemes of FTSE 100 companies report a surplus after so many years in the red. However, the surplus may not survive once companies reflect the latest mortality projections in their accounts.

"Also, companies whose pension schemes remain heavily invested in equities run material investment risk and the fragility of the surplus was highlighted by recent stock market falls."

The report claims there is a one in ten chance that the value of equities could fluctuate as much as 50bn higher or lower during the coming year.