Company pension funds are in the news again after it was reported that Rank Group was considering putting its scheme up for sale.
With assets worth £700 million, the Mecca Bingo chain owner's pension scheme is valued more highly than the company itself, which has a market capitalisation of £655 million.
While a major company has yet to sell its pension scheme, Rank is not thought to be alone in exploring the possibility of a buyout, under which the sponsoring company clears any outstanding deficit and pays an insurer or third party to take the scheme off its hands.
In fact a number of specialist buyout companies have sprung up during the past 18 months, seeking a share of a market previously dominated by Prudential and Legal & General. Synesis Life, Paternoster and Pension Insurance Corporation all launched last year. Aviva's UK arm Norwich Union also announced its intention to bid for pension buy-out deals.
Talk of pension buyouts would have been unthinkable a few years ago, when company pension schemes were labouring under massive deficits. Even at the beginning of last year the funding shortfall collectively faced by schemes stood at £80 billion.
But record cash injections from sponsoring companies, combined with restructuring at many schemes to reduce liabilities and a strongly performing stock market helped wipe out the deficits.
The pensions safety net, the Pension Protection Fund, said at the end of June that the UK's defined benefit schemes, or so-called final salary pensions, collectively had a surplus of £99 billion based on their PPF liabilities, compared with a shortfall of nearly £8 billion in July last year.
At the same time consulting actuaries Lane Clark & Peacock reported that the defined benefit schemes of FTSE 100 companies collectively had £12 billion above what was needed to meet their liabilities in mid July.
It said this was a record improvement from the £36 billion deficit they faced at the same point last year and was the first time since 2002 that its survey had shown schemes to be collectively in the black.
However, the good news was short-lived with stock market falls wiping billions of pounds off the funds' value before Lane Clark & Peacock had even been able to publish its study, putting schemes £6 billion into the red.
The situation worsened as the US sub-prime mortgage default crisis deepened and by the middle of last month, the UK's biggest 200 defined benefit schemes faced a £21 billion deficit again.
But despite funds crashing back into the red, most analysts remained upbeat about their prospects.
Marcus Hurd, senior consultant and actuary at Aon Consulting, said the shortfall was still well down on the £40 billion deficit pension schemes faced in January this year and the £80 billion black hole they had at the beginning of 2006.
Equity markets are also only one side of the coin that determines pension scheme funding and of equal importance are bond yields, which are used to calculate schemes' liabilities.
Mr Hurd said that yields increased from 5.1 per cent in January to 5.7 per cent last month, adding that if yields had remained at the January levels, pension funds would be facing a £50 billion deficit.
The pensions landscape is now very different to when scheme deficits first began hitting the headlines in the early 2000s.
The issue of funding shortfalls came to the fore with the introduction of a new accounting standard FRS17. Under this companies were no longer able to smooth out stock market volatility and instead had to include a snapshot of their scheme's funding position on a given day on their balance sheet.
At the same time stock markets began falling as the dotcom bubble burst and they were further depressed following the September 11 terrorist attacks, while life expectancy also began increasing faster than had previously been predicted.
This combination of events forced firms to take a long, hard look at their company pension schemes and kicked off a round of closures to new members.
Today 81 per cent of defined benefit schemes are closed to new members, up from 68 per cent two years ago.
At the same time contribution levels from both companies and individuals have been ratcheted up. A report from the Association of Consulting Actuaries found that during the past five years the average employer contribution to schemes has nearly doubled, rising from 11.5 per cent of staff pay to 22.6 per cent, while the amount members themselves have to pay into the schemes has risen by 40 per cent to 6.1 per cent of their salary.
Meanwhile, two-thirds of companies have made special additional contributions into their schemes in a bid to close funding shortfalls.
Many companies endured battles with unions to restructure their schemes, typically raising their retirement age and reducing the accrual rate.
Other firms changed schemes from being those based on final salary, where the company bore all the risk, into hybrid schemes where the risk was shared between the company and the worker. There was also a shift into schemes that based payouts on people's average earnings rather than their final wage.
Around 14 per cent of final salary schemes were even closed altogether, with existing members barred from making any future accruals.
The action helped put company pension schemes on to a stronger footing and left them better able to weather future storms, but they are by no means out of the woods yet.
Lane Clark & Peacock has warned that, irrespective of stock market moves, the funding position of most pension schemes is under threat from an equally pressing problem - increasing life expectancy.
The group said many companies had updated the mortality assumptions of their schemes during the past two years, reflecting growing evidence that life expectancy is continuing to rise rapidly.
But it said even the updated figures, which tended to increase the amount of time scheme members were expected to live for by around 1.5 years, may not be enough as predictions for life expectancy continued to increase.
Each additional year of life expectancy adds around £12 billion to pension scheme liabilities, meaning continued rises could potentially have a big impact on the overall funding position of FTSE 100 schemes.
Many companies had been looking to cash-in on the strong stock market returns seen until the recent financial turbulence in a bid to hold on to gains made, which would at least give them a fighting chance to offset funding issues such as longer life expectancy.
Having reduced or in many cases wiped out their deficits, companies were hoping to shift pension assets out of volatile equities into more stable bonds. But the recent market turmoil caught many off guard and trustees have been reluctant to sell at the bottom of the market and crystallise losses, leaving schemes, for the time being at least, at the mercy of rising and falling stock markets.
No one knows how long the current financial turmoil will last for, or when it will bottom-out and a prolonged downturn in equity markets will further highlight the risks of the schemes to their sponsoring companies.
Ken Willis, investment partner at Lane Clark & Peacock, said: "Pension schemes are long-term investments but it does highlight the risks that exist.
"Despite the fact that it is a long-term investment if you have particular plans or accounting deadlines it could become quite an important issue."
