Projections in line with the employee benefits standard IAS19 by Mercer Human Resource Consulting showed that deficits across the FTSE 350 dropped by 29%, from £86bn in 2005 to £61bn for 2006 year-end accounts, but investment strategy and longevity risks still represent major sticking points for companies.

Tim Keogh, worldwide partner at Mercer, predicted a scramble by companies to pump cash into their schemes before the Pension Protection Fund recalculates its levy in March.

‘Intentionally or otherwise, the PPF levy will encourage companies that can fund their pension schemes by borrowing elsewhere to do so. As a result, we may see a large burst of pension contributions before the end of March when the PPF levies are recalculated. But, as in previous years, much of this money will come from financially strong companies with choices, not weak ones with problems.’

While some employers responded to the introduction of PPF levies by increasing contributions last year, Mercer believed that tax advantages, strong cashflow and corporate deals have been the major drivers of large funding payments so far.

Research showed that over the last four years companies have tried to manage their pension risk by reducing the level of future benefits, either through cutting existing members’ benefits or closing schemes to new entrants.

Although this action reduced future risks, it did not diminish the legacy exposure, which comes from a scheme’s investment strategy and the uncertainty surrounding member longevity.

Last year, differences in longevity forecasts highlighted the disparity that can exist between major corporates. BT’s pension liabilities would rocket by £3bn to £41.2bn and more than double its deficit to £5.5bn if the Royal Mail’s longevity estimates were applied to the telecoms group.

The consultancy believed rising funding levels were good news for pension scheme members, but the underlying longevity and investment risks remained significant issues for sponsoring employers.

Mercer highlighted considerable activity in the longevity trading market, but the transfer was mainly between insurance companies rather than from pension schemes to insurance companies.

Keogh said: ‘The critical question this year is whether we will see pension schemes transferring substantial levels of longevity risk.