It's deeply ironic that pensions have become the hottest item on the finance agenda at both corporate and personal level. For decades, most companies struggled to persuade staff under the age of 50 to take even a passing interest in the running or performance of their funds. Dividends, bonuses and share options were the topics everyone wanted to know about. Pension schemes were of minimal interest to most individuals until they came within sight of retirement. Even then the assumption was that - like death and taxes - a guaranteed level of pension from your employer was one of life's certainties. Millions of people have since discovered that isn't the case of course, with around half of all final salary schemes now closed to new entrants. Stock market volatility is the usual explanation for the eye-opening speed at which seemingly profitable funds have accrued massive, and often crippling, liabilities. KPMG research shows that 45 listed West Midland companies have total pension fund deficits of roughly £1.86 billion, according to accounts filed with Companies House. The largest ten corporates account for some £1.7 billion, with the other 25 facing total liabilities of £160 million. Birmingham's oldest company, Firmin, recently became just the latest local business to blame a pension fund deficit for its collapse. However, KPMG's pensions partner David Fripp says the funds' major challenge isn't the lower value of their investments in equities - which is often blamed for the crisis. "The biggest problem has been a sustained period of low inflation and low long-term interest rates, which means yields from bonds and gilts are at historic lows. "There is a widespread perception that the issue has only arisen recently, but in reality there has been slow and grinding progress to the current position over the last twenty years." Increasing life expectancy has played a part in the current problems of course. "People might only be living (say) three years longer than they might have 20 years ago, but that's a high percentage of their retirement period, which increases the amount their pension scheme has to pay out," says Mr Fripp. He regularly meets finance directors at a loss to understand what has gone wrong with a fund they considered both well-run and well-funded. "Plenty of astute and financially-aware individuals have expected that the problems facing their final salary schemes would be resolved when the stock market rose, but that was never going to happen," says Mr Fripp. "In the last three years, we've seen typical annual returns from equities of around 20 per cent, but the difficulties haven't lessened." Mr Fripp says funds appear to generate massive deficits in the short-term because they are typically only valued every three years. "Any fund's position can change dramatically during that period. Directors may not have increased the level of benefits, but the key issue is the increasing cost of providing those benefits." Higher interest rates would wipe out most funds' shortfalls, by pushing returns from bonds and gilts back to their previous levels. "If base rate rose by one per cent, a typical fund's liability would fall by 20 per cent. If it went up by two per cent, the problem wouldn't exist," says Mr Fripp. However, after ten months of unchanged interest rates, even the predicted next upward move is only likely to be 0.25 per cent. So how can finance directors and their boardroom colleagues address the new pensions environment? "It is difficult to do anything of major significance to an existing liability, but there are some issues which can be tackled," says Mr Fripp. He believes FDs would be wise to bring in specialist advisers, who will usually take a different perspective from those advising the pension fund trustees. "Recent regulatory changes are pressuring many trustees into demanding more cash more quickly from their company to reduce their deficit," says Mr Fripp. "It is causing internal tensions in many companies, and getting a second opinion on the subject is the best way of opening up the debate." Once a liability is removed, or a new fund established, Mr Fripp sees merit in devising a new investment strategy. "Many commentators feel the equity market is undervalued. P/E ratios are now around 14, whereas they were in the region of 20 not so long ago. "Companies might be nervous about returning to equities, but what they need is a fresh look at where their investments are being made." The only certainty though is that nothing can be changed in the short-term. "The problem took 20 years to develop, and certainly isn't going to disappear overnight," admits Mr Fripp. "Hopefully everyone now understands that companies must address pension funds issues as a central element of their operational strategy, not as an occasional subject." ..SUPL: | 
