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Funds Said Low for British Pensions

July 4, 2002

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LONDON (AP) _ Sixty-one percent of Britain’s 350 largest publicly traded companies face a shortfall in their employee pension funds, as measured by accounting rules that become mandatory next year, a survey said Wednesday.

The study by Mercer Human Resource Consulting Ltd. illustrates the challenge that firms face in meeting their pension obligations while the bulk of their assets are invested in volatile stock markets. Mercer, headquartered in London, surveyed the so-called FTSE-350 companies whose shares trade on the London Stock Exchange.

The findings were likely to add to concerns about the state of Britain’s pensions _ an issue that threatens to embarrass Prime Minister Tony Blair’s Labor Party government. The government took the unusual step Tuesday of ordering a review of the data used to estimate the value of employee pensions, a day after apologizing for overestimating the amount of money in pension savings accounts.

Under a new accounting rule called FRS 17, British companies must report on their balance sheets any surplus or deficit in their pension funds. Although the rule won’t be a reporting requirement until next year, Mercer used it in analyzing the year-end accounts of 146 of the 350 largest publicly traded companies as of Dec. 31, 2001.

David Fairs, a pensions specialist at financial services group KPMG, said Mercer’s findings came as no surprise, given the current weakness in stock markets. He said employees at these firms should not panic.

``If the stock market recovers or interest rates rise, then the problems in many companies will just fall away. They won’t have a deficit,″ he said. ``I think it would be wrong to rush into action on the basis of a snapshot based on an FRS 17 position today.″

Mercer noted that companies are increasingly shifting their pension assets out of stocks and into bonds and other less risky investments. In one extreme example from last year, drugstore chain Boots Co. PLC shifted all its pension fund assets into bonds from stocks.

Mercer also highlighted a trend away from the familiar benefit of guaranteed pension payments.

As the expense of administering pensions rises, more companies are starting to make specified contributions to their pension funds and letting the actual payout be determined by the future performance of those investments instead of guaranteeing a certain payout.

Fairs noted that businesses are making this shift almost daily in an effort to cut costs.

As employees take more responsibility for their retirement, Fairs said they’ll need to invest as much as a fifth of their salary if they want to receive ``a good pension″ from their retirement accounts.

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