The deficit for the final salary pension plans of FTSE 100 companies currently stands at £110 billion according to actuaries at Deloitte. This is a dramatic £35 billion increase in deficits in the few weeks since the end of 2005. Deloitte strongly believes UK companies should be looking for new ways to actively manage away the volatility of their pension deficits.

FTSE 100 aggregate FR17 deficit graph in the attachment below.

Commenting on the change, Tony Osborn-Barker, a director in consulting at Deloitte, said: “What a difference two weeks makes. This is a direct result of the “double whammy” that we always feared – a rise in inflation expectations and a fall in bond yields.”  Although the value of the assets held by pension schemes will have increased in line with the recent rise in markets, this has been outweighed by falling real interest rates which increase the value of pension liabilities. In the last 15 years, real interest rates have collapsed from 4% to less than 1%, thereby hiking pension liabilities.

“To think that it can’t get worse is to ignore the experience of Japan over the last 25 years” Osborn-Barker continued. “The Holy Grail for companies wanting to stabilise their pension deficit is to find assets that ‘match’ their pension liabilities and we are seeing significant movements towards liability-driven investment strategies.”

Liability-driven investment (LDI) strategies involve the purchase of assets which pay a variable rate of interest and using derivatives to ‘match’ these to payments the pension scheme is expected to make in the future. The aim is for assets and liabilities to both move in line with market conditions thereby stabilising the pension deficit.

Osborn-Barker said: “One big issue with ‘matching’ is the so called ’regret risk’ - if buoyant equity markets continue through 2006 and beyond, schemes and sponsors will not benefit. This risk is easier to manage than people think and we have advised schemes to invest in appropriate derivatives, whose value increases in line with equities once the equity market reaches a certain level. How to best fund the deficit will depend though on several factors including the objectives of the company, the risk attitude of the trustees and the size of the deficit”.

Notes to editors

The above analysis is based on Deloitte calculations of FTSE 100 companies using disclosed pensions accounting information on their UK and overseas pension and post retirement benefit arrangements.

About Deloitte

In this press release references to Deloitte are references to Deloitte Total Reward and Benefits Limited, a subsidiary of Deloitte & Touche LLP.

Deloitte & Touche LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu (‘DTT’), a Swiss Verein whose member firms are separate and independent legal entities. Neither DTT nor any of its member firms has any liability for each other’s acts or omissions. Services are provided by member firms or their subsidiaries and not by DTT. Deloitte & Touche LLP is authorised and regulated by the Financial Services Authority. The information contained in this press release is correct at the time of going to press.