The pensions black hole faced by the UK's top companies could be wiped out by the end of 2004.

According to forecasts by pensions advisers Aon Consulting, the overall pensions deficit for FTSE 100 firms fell from £65 billion in December 2002 to £56 billion at the end of August 2003.

And based on an analysis of investment bank equity and bond market forecasts, Aon predicts the deficit could disappear by the end of next year.

Three consecutive years of stock market falls had trimmed the value of companies' pension funds, forcing them to set aside more of their funds to plug the gap.

But the FTSE 100 Index has risen by more than 30 per cent since March, boosting the value of those funds and narrowing the gap.

If the market follows the trend set out by stock market strategists and hits 4,900 points by the end of 2004, Aon predicts the overall pensions deficit will be reduced to £41 billion.

And researchers say that deficit would be wiped out entirely if a forecast 0.5 per cent increase in long-range corporate bond yields materialises over the same period.

Aon also found cautious optimism about pension funds was filtering through to the people in charge of pensions in top UK firms.

A poll showed more than three-quarters (77 per cent) of senior executives at FTSE 350 companies were "cautiously confident" that things would improve for their company's pension funds and their exposure to equity markets.

Simon Martin, head of research at Aon Consulting, said: "These forecasts provide further evidence of growing confidence after a period of major turmoil in the pensions market.

"However, not all companies can look forward to the end of their pensions deficits at the same time. This will depend on the investment mix of their pensions funds and their exposure to equity markets."

Mr Martin urged company pension fund managers to keep faith in the stock market but to take a "more active role" in managing their employees' funds.

He added: "Pension fund managers need to better understand what investment risks they face and their exposure to the markets so they are able to make more informed decisions."

Aon's study also found two-thirds of employers perceived increasing levels of Government legislation on pensions to be the largest single threat to the health of their company pension funds.

However, 74 per cent said they did not want the responsibility of advising employees about managing their pensions.

Wednesday October 22, 2003