Final salary/defined benefit pension schemes set to return as top firms achieve pension fund surplus

Defined benefit pension schemes could make a comeback, it has been claimed after a report revealed the UK was emerging from its pensions-funding ‘black hole’.

The annual report by actuary firm Lane Clark & Peacock showed the FTSE 100 firms with an aggregate pension funding surplus for the first time in five years. Ken Willis, investment partner at Lane Clark & Peacock, told Personnel Today that this was “fairly representative of the UK as a whole”.

More than half of the FTSE 100 firms have closed their defined benefit schemes – where members receive a proportion of their final salary – to new members as they fought to limit their liabilities.

But Lane Clark & Peacock partner Bob Scott said: “I suspect we have not seen the end of defined benefit schemes.

He added: “I do not believe we will return to the days when people received a 60th [of their final salary for each year they were at the company] every year from the age of 60, but companies will find other ways to offer security to employees.”

Willis added that defined benefit schemes where members receive a proportion of their career average salary were on the increase.

There were £20bn of pension funding surpluses among FTSE 100 firms in mid-July 2007 and just £12bn of deficits. This compares with an overall deficit of £36bn the year before.

The main reason given for the upturn in fortunes was the soaring value of UK equities. The average FTSE 100 firm has 57% of its pension scheme funded by equities, with one scheme 81% funded in this way.

This left many schemes at risk from a return to deficit following a downturn in the stock market, Lane Clark & Peacock warned. The firm also pointed out that an increase in life expectancy of just one year would add £12bn to the pension liabilities of the 100 firms.

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