Retirement Benefits, the next negative(FRS17 vs SSAP24)

Pension funds need 30 percent stock rally
LONDON (Reuters) - Blue-chip stocks would have to rise by about 30 percent from current levels to wipe out big pension fund shortfalls, according to professional services firm Deloitte & Touche LLP.

Pension scheme deficits in companies listed on the FTSE 100 index (news) rose by 5 billion pounds to 65 billion pounds at the end of 2004 from a year earlier even though firms injected fresh money into retirement pots, Deloitte's report said.

Looking ahead, pension schemes are likely to see deficits fall to around 60 billion pounds by the end of next year, based on companies' own expectations of equity market performance, the report said.

The 2000-2002 stock bear market, new accounting standards, low bond yields and an ageing population pushed Britain's occupational pension system heavily into the red after it enjoyed big surpluses during the 1990s.

To restore pension funding to balance, employees would either have to raise contributions substantially or the FTSE 100 index, for example, which is currently around the 4820 point mark, would have to rise to about 6410 points, a Deloitte spokeswoman said.

That looks unlikely to happen in the near future. ABN Amro (Amsterdam: AAH.AS - news) , for example, expects European equities to rise next year in line with earnings growth of about 9 percent plus expected dividends, which means an overall return in 2005 of 10 to 11 percent.

Although the overall capitalisation of UK stocks rose in 2004, boosting asset values, liabilities rose even faster, the report said.

At present, British firms use an accounting standard called FRS 17, which values a pension fund's liabilities by reference to the yield of sterling AA-rated corporate bonds. If yields fall, as they have in recent years, then the amount a plan must invest to deliver expected future benefits will rise, increasing its liabilities.

The cost of dealing with big deficits has prompted a raft of firms such as Imperial Chemical Industries (LSE: ICI.L - news - msgs) to close final-salary, or defined benefit, plans to new staff, switching them to schemes in which benefits are tied to market returns.

The creaking state of UK pensions has pushed the issue of saving for retirement up the political agenda. The government has unveiled measures to raise confidence in final-salary pensions, including creating a regulator with far-reaching powers and a Pension Protection Fund to stand behind benefits in schemes when a firm goes bankrupt.

Earlier in December, Aon Consulting said shortfalls in blue-chip firms would not vanish for at least another 12 years on current trends.