BAD news for the members of American private final salary pension schemes. January's falling stockmarkets and corporate bond yields mean that the aggregate deficit of companies in the S&P 1500 (not a typo; it's a broader measure than the 500) rose by $68 billion to $472 billion, according to Mercer, the consulting actuary. On average, plans are now just 79% funded. 

Of course, the pension promise remains. But the longer that funds stay in deficit, the more likely it is that some will go bust with a shortfall. That will send workers and retirees into the arms of the Pension Benefit Guaranty Corporation, which does meet normal retirement benefits (but not health benefits), but is subject to a cap and offers no inflation-linking. Even if the company doesn't go bust, it will have to divert resources to funding the pension shortfall; money that might have been used to increase current pay, or invest in new plant and equipment.

In Britain, however, the picture was different. Although it also saw a combination of falling equity prices and bond yields, the deficits of FTSE 350 companies rose by just £2 billion from £64 billion to £66 billion, according to Mercer. Why? Because around half of all pension fund assets are invested in bonds. Their value rose in January, offsetting the decline in equities.

American funds have a much lower exposure to fixed income assets.

A pension is a long series of payments (inflation-linked in Britain) made over an extended period. In structure, it is a very like a bond. That is why accounting standards and actuaries have moved to discounting the value of future pension fund liabilities (a calculation you need to make to work out the total exposure) by bond yields. For a pension fund to buy bonds is thus to match its liabilities; to hedge. This line of thinking - asset-liability matching, as it is known - is much more prevalent in Britain than in America.

Perhaps it's all to do with British pessimism and American optimism; Americans just assume the equity market will go up. But another factor is the short-term cost; bonds offer low returns.

An employer that hedges with bonds has to put more cash aside upfront. This explains why American public sector pension plans assume 7.5%-8% annual returns; instead of pushing through unpopular tax hikes to fund pension promises, they can hope the equity market will do the work.

But as John Ralfe, the consultant, and others have been arguing for 15 years, companies are essentially gambling on the equity market. That's a long way from their core business of, say, widget-making. And in some cases, the pension deficit can be huge with total liabilities bigger than their stockmarket value. It can't be the right way to run a business.