Rises in the stock market and increased company pension contributions have wiped some £60bn off the UK pensions fund deficit, according to a report by the Confederation of British Industry (CBI).

The report, published today, suggests the deficit was around £100bn at the end of 2003, a reduction of almost 40 per cent on the CBI's £160bn estimate published last June.

The CBI described the findings, based on FRS17 valuations, as "hugely encouraging" but stressed that the overall deficit remains enormous and is still a major business concern.

The employers' organisation estimates that firms will still have to make additional contributions averaging £6bn a year over the next three years.

But it points out that this is around half the £12bn estimate that seemed likely at the height of the pensions crisis in the Spring of 2003.

The report shows that constraints on business investment caused by pensions funding problems are likely to moderate in 2005 and 2006.

But the CBI believes the pensions crisis has made the recovery in corporate investment more muted than it would expect at this stage of the economic cycle.

It predicts investment growth of 3 per cent in 2004, 5.9 per cent in 2005 and 5.2 per cent in 2006. This compares with over 10 per cent following the turn of the investment cycle in the 1990s.

Ian McCafferty, CBI Chief Economic Adviser, said: "Amid all the bad news about pensions, these findings give reason for a little cautious optimism.”

“Firms are still having to make sizeable financial provisions to make up the shortfalls in pensions schemes but the problem is more under control. The impact on the financial health of the corporate sector is therefore easing, opening the prospect of more vigorous investment spending in 2005 and 2006."

In a CBI survey published earlier this month, 24 per cent of firms reported that additional pension provisions had had a significant impact on investment plans.

The survey also showed firms battling to make up pension shortfalls by increasing contributions. The average contribution was 16.2 per cent of payroll, but one in four firms gave more than 20 per cent and one in fourteen gave more than 30 per cent.

The CBI survey showed how the pensions crisis has triggered a significant shift in the type of pension on offer as firms respond to the need to reduce liabilities.

Two thirds of firms have kept defined benefit schemes for existing employees but only 24 per cent for new employees. Forty one per cent of firms have switched from defined benefit to defined contribution pension schemes over the past two years.

Mr McCafferty called on the government to help employers and employees by offering firms more attractive tax incentives to encourage pension provision.

He said: "Employers remain committed to pensions despite the difficult circumstances but we have got to encourage them to stay in the game. There are still enormous liabilities and the shift away from final salary schemes is likely to continue. Companies are telling us that the government could do more to encourage employers by providing more attractive tax incentives."