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MARKET COMMENT
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According to a story in today's Financial Times, many of the UK's largest companies have seen the deficits on their final-salary pension schemes balloon in recent months. A scheme is in deficit if the estimated cost of the pensions it is currently paying out and expects to pay out in future is greater than the current value of its assets. According to research from Morgan Stanley, over the course of 2002, the overall deficit on schemes rose from a 'mere' £200m to £65b. The decline in the stock market in the first month of this year has increased that figure to an eye-popping £85b, which is the same as the value of the UK's largest company, BP (LSE: BP.)(NYSE: BP). Considering the swiftness of the recent decline in the stock market, you could argue that these figures aren't too surprising. Typically, funds have around 70% of their assets in shares, with the remainder in a mixture of bonds, cash and property. As the stock market has fallen around 30% since the start of 2002, all else being equal, this means that a typical fund will have fallen by 21%. However, their liabilities will have stayed at roughly the same level or increased, and this is why the total deficit has increased so rapidly. These figures mean that firms will have to make higher pension contributions each year in order to make up the shortfall. This will reduce their profits and the amount of cash they generate. How long they have to make up the difference will vary from fund to fund. As shares will continue to be volatile, any recovery in the stock market will ease the burden, while further falls will add to the pain. From an investor's point of view, the companies most at risk are those that have been around a long time and have a mature members' profile. In other words, they have lots of people drawing a pension and relatively few in employment still contributing to the scheme. For a detailed look at how to assess the vulnerability of your own investments, see this Qualiport article. Morgan Stanley highlights British Energy (LSE: BGY), BAE Systems (LSE: BA.), Rolls-Royce (LSE: RR.) and Royal & SunAlliance (LSE: RSA)(NYSE: RSA) as those most likely to have to up their pension contributions. Unfortunately, each of these companies has enough worries with their main business at the moment. In closing, it's not yet the time to start panicking. These deficits could shrink just as rapidly as they have grown. However, if you're investing in a company and you don't know what its pension situation is, now would be an excellent time to find out! More: What Everyone Must Know About Pensions | Companies With A Pension Problem