Higher equity returns and a surge in company contributions have made a sizeable dent in the pensions 'black hole' of some of the UK's biggest companies.

The deficit faced by FTSE 100 companies with final salary pensions fell to £42 billion from £55 billion during the year to the end of July, according to actuarial consultants Lane Clark & Peacock (LCP).

However, the group added that employer contributions needed to rise further to meet increasing future liabilities. It said the FTSE 100 Index would have to rise above the 5900 mark from its current level of around 4400 if the combined deficit under the new accounting standard FRS17 was to be wiped out completely.

LCP said during the year many companies significantly increased the amount they paid into schemes, collectively contributing £10 billion. It added that these contributions exceeded the cost of pension benefits scheme members accrued by £3.4 billion, compared with the previous year when there was a £600 million shortfall between accruals and contributions.

Commenting on the survey results Bob Scott, a partner at LCP said, “Although pension deficits have reduced by more than 20 per cent, there were still ten FTSE 100 companies which reported deficits in excess of 25 per cent of their market capitalisation. Such large deficits may act as deterrents to potential purchasers. This contrasts with the position in the 1980s when big surpluses made certain companies attractive targets.”

Chris Tavener, partner at LCP and author of the report said, “The improvement in pension deficits has come at a big price for some blue chip companies and it’s difficult to see companies sustaining these increased levels of contribution in the future. It will be a question of who is more important, the shareholders or the pension scheme members”.