Britain’s biggest pension funds crawled to a “fragile” £12 billion surplus in the middle of last month, but then saw £6 billion wiped out by stock market turbulence in the last two weeks of July.

The huge reliance that the funds have on the stock market and the danger posed by just a year’s improvement in life expectancy were illustrated dramatically by the fourteenth annual Lane Clark & Peacock (LCP) Accounting for Pensions report. Bob Scott, a partner at LCP, said: “UK pension schemes aren’t out of the woods yet.”

To complete the study, the most comprehensive look at pension scheme funding among Britain’s largest companies, actuaries trawled through the accounts published by FTSE 100 companies with financial year-ends falling before December 31, 2006. Models were then used to forecast how the figures would have moved by mid-July 2007.

Under the accounting standard IAS19, final-salary schemes hit a net surplus of £12 billion in the middle of last month, a record improvement from a £36 billion deficit at the same time last year.

Stronger equity markets contributed £30 billion to Britons’ pension pots, while higher yields on corporate bonds knocked a further £10 billion off the FTSE 100’s retirement bill. Only pension schemes with an unusually low allocation to equities, including those at Boots, ICI and Resolution, felt little benefit.

On the more stringent buyout measurement of deficit — showing how much money funds would need to buy pensions immediately for all of their members — Britain’s biggest pension funds had a shortfall of £90 billion, down from £175 billion last year. Companies made record contributions to their funds, putting in £13.4 billion in total by the end of 2006, up from £11.3 billion in 2005. BAE Systems made the biggest contribution, with a £1.1 billion payment to its global pension schemes.

Mr Scott said: “The surplus may not survive when companies reflect the latest mortality projections in their accounts. Also, companies whose pension schemes remain heavily invested in equities run material investment risk.” He said that the “fragility” of the funding was demonstrated by the £6 billion knocked off the surplus when stock markets tumbled in the final weeks of July amid a panic about liquidity in parts of the credit market.

He said that there was a one-in-ten chance that asset movements could erase £50 billion from the FTSE 100’s pool of pensions assets. Companies with the largest allocations to equities include BP, with 79 per cent of its fund in stocks, and Centrica and Wm Morrison, with 78 per cent.

Improving mortality rates remained a threat to scheme funding, Mr Scott said. “Twenty-six companies changed their assumptions on life spans, increasing them by an average of 1.5 years, but the question is whether this is enough,” he said. “Every year of improvement in life expectancy equates to a cost of £12 billion to pension schemes.”

At present schemes assume that male pensioners aged 60 in 2006 will live until they’re 84.6 years old on average, up from 83.8 years in 2005. Land Securities made the most significant change in its life expectancy projections, adding 3.4 years to the average lifespan of workers.

Just five companies — Boots, BP, Centrica, Scottish & Newcastle and Wolseley — reported that their final-salary schemes remained open to new employees. No company last year followed Rentokil’s lead in closing its scheme to all members.

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