Falling stock markets and interest rates have wiped £15bn off the value of UK company pension schemes so far this year, calling into question their investment strategies and reviving concerns about underfunding.
By the close of markets on Friday, there was an aggregate £5bn shortfall in the plans of the FTSE 350 largest companies, compared with a £10bn surplus at the end of December, according to data from PwC.
At one point the size of the hit to the schemes was £25bn. The gyrations highlight the fact that pension finances remain firmly tied to the fortunes of stock markets, in spite of companies' efforts to diversify.
"What we have had over the past year was a lot of complacency," said John Ralfe, an independent pensions consultant. "The risk of offering a defined benefit pension scheme is considerable. You cannot invest your way out of the problem."
Earlier this week, analysts at Morgan Stanley slashed the earnings forecast for BT Group - whose pension scheme is roughly 60 per cent invested in equities - in part because of the deterioration in the finances of the scheme.
The National Association of Pension Funds said that the average scheme was now 55 per cent invested in equities, down from 60 per cent in 2006 and 61 per cent in 2005. Rentokil Initial has in the last year raised bonds to 80 per cent of its portfolio from 38 per cent. But Tesco and BAE Systems, meanwhile, each have just a 21 per cent allocation to bonds and Morrison Supermarkets, BG and International Power have bond weightings in their schemes of 17, 16 and 14 per cent respectively.
Analysts said the sharp market movements had highlighted the shortcomings in the way companies are required to disclose their pension liabilities, a method that many criticise for hiding the true cost of wiping out their retirement obligations altogether. Current accounting rules allow companies to reduce the size of their liabilities by taking account of future investment income that may never be earned.
In spite of the enormous volatility, The FTSE 100 closed on Friday at 5,869, down 7 points on the day and only 32 points on the week.