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Deficit rockets in three weeks

Pension scheme liabilities soar as gilt yields plummet

The pension deficit facing FTSE 100 companies has leapt to 110bn in the face of rising inflation expectations and falling bond yields.

Actuarial studies by consultancy Deloitte have uncovered a 35bn increase in deficits from 75bn to 110bn in the first few weeks of this year.

Director in consulting Tony Osborn-Barker says although the value of assets held by pension schemes have increased in line with the 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 int- erest rates have fallen from 4 per cent to under 1 per cent. Osborn-Barker warns that this coiuld fall further and points to the experience of Japan over the last 25 years.

Fund manager F&C says price rises in index-linked gilts over the past few weeks have resulted in sharp drops in yields. The yield on the benchmark 1.25 per cent index-linked gilt 2055 fell from 0.59 per cent to 0.48 per cent last week. The figure was 0.77 per cent at the start of the year.

F&C head of insurance asset management and asset liability management Derek McLean says: “Most funds will be lar- gely unaware the deficits will have swollen rapidly in the last few weeks and the current position will be much worse than the position at year-end.”

Osborn-Baker says: “One big issue with matching is the so called regret risk – if buoyant-equity markets continue through 2006 and beyond, then 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 rea- ches a certain level.”

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