General Motors yesterday underlined the scale of the pensions crisis facing US companies by announcing a record $10 billion (€8.6 billion) bond issue to shore up its retirement fund.

The move came as a report warned that the total pension fund deficit at the top 500 US companies could top $278 billion by the end of the year.

The UBS report also warned that over-optimistic return assumptions could be hiding problems at companies with apparently healthy funds.

GM said it planned to raise $20 billion in cash this year from the bond and sales of businesses in order to fill the pensions hole.

But the carmaker also highlighted the problems of low inflation when it said the 0.75-1 percentage point drop in interest rates on corporate bonds this year had added $5.7-$7.6 billion to the $19.3 billion hole in its fund. As rates drop, the present value of future pensions payments increases.

This was partially offset by a 9 per cent rise in the fund's assets this year of about $5.4 billion. UBS said pension funds of the S&P 500 companies had their "highest deficit in history" despite a steady improvement in stock markets this year.

The bank said pension underfunding widened to $239 billion at the end of May, up from $212 billion at the end of 2002, and could hit $278 billion by the end of the year. Mr David Bianco, author, said earnings per share for the S&P as a whole should be reduced by $2, or 5 per cent, this year because of "aggressive long-term return on pension asset assumptions unlikely to occur given the declines in long-term interest rates".

He called for a change in US pension accounting to reflect more accurately the volatility of equity returns. In 2002, 193 companies reported pension assets on the balance sheet when they really had pension deficits, while a further 63 claimed pension income as a boost to earnings when they really had deficits, Mr Bianco said. - (Financial Times Service)