Action needed to rescue pensions’ shortfall

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Human resources services firm, Hewitt Associates urge companies to adopt a broad-ranging action plan to address pension funding shortfalls.

Hewitt, say that FTSE100 pension schemes have suffered from a financially stagnant year with estimated combined deficits, measured on the company accounting standard FRS17, thought to be around the £50-60 billion mark for most of 2004.

The company warns that without any other corrective action, a dramatic increase in stock market values would be needed to wipe out the aggregate FRS17 shortfall - around a 30% surge in equity values relative to bond prices.

Raj Mody, pensions strategy consultant at Hewitt commented:

"2004 has been the most boring year in financial terms for pension plans since the peak of the stock market, and has left companies wondering what they can do to break out of their deficit doldrums. Our analysis suggests that a compromise mix of solutions is the only realistic option for most companies. No single solution in itself is likely to get companies out of deficit - attacking the problem on only one front will need extreme, and probably impractical, measures.

"We have been suggesting that companies will need to accept a ‘triangle of compromise’ to solve the funding challenge: a combination of paying extra contributions, paying benefits later, and reducing the level of benefits - all subject to existing protections for benefits already earned."

Mody says, however, that even with strategies designed to address funding shorfalls, businesses should not sit back.

”They still face new risks, such as the impact of increasing life expectancy. This should usually be good news for people but it's not so welcome for a company standing behind hefty pension annuity commitments. By our estimates, a one-year increase in life expectancy could add over £10 billion to FTSE100 pension plan deficits on the FRS17 basis. Adopting new "middle-ground" pension designs can help companies avoid adding to this existing burden in the future."

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