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MARKET COMMENT
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Corporate pension deficits just won't go away. Even though the stock market has rebounded, the funding gaps have not been plugged and many blue chip firms have upped their contributions significantly. Underlining their importance to company valuations, the shortfalls are now becoming a key issue with potential bidders. Take Philip Green's proposed offer for Marks & Spencer (LSE: MKS). Green didn't make his billions by skimming the financial small print, so no wonder the first item on his information wish list was "confirmation that... the M&S pension schemes are now fully funded (or, if not, by how much and on what basis) and details of the current and future annual cash contributions being made thereto by M&S". The 2004 M&S annual report has since revealed underlying earnings of £563m earnings and a £670m pre-tax pension deficit. Then there's WH Smith (LSE: SMWH). Recent press reports suggest venture capital firm Permira could back out of current takeover talks, with the stationer's pension fund trustees apparently demanding the scheme deficit be made good should control change hands. That could be a big ask for Permira, since Smith's 2003 accounts showed £71m of earnings alongside a £215m deficit before tax. Soon there'll be no hiding place for such burdensome schemes. Although FRS17 allowed companies to disclose their pension details in the back of their accounts, international accounting standards from 2005 onwards will bring all the deficits and associated costs to the main profit and loss and balance sheet statements. So rather than get a nasty headline earnings/asset value surprise in the next year or two, shareholders ought to be investigating now how reported deficits stack up to current profits. In fact, if sizable shortfalls can give such canny buyers as Green and Permira a bit of a headache, they'll probably provide ordinary punters with much worse. Where next? What FRS17 Means For Your Shares | Avoiding Pension Black Holes