RPT-Widening pension gap looms large for Europe's top firms

Thu Aug 15, 2013 12:21pm EDT

By Sarah Mortimer

LONDON Aug 15 (Reuters) - Six of Europe's top 10 companies by revenue are sitting on pension liabilities bigger than a quarter of their stock market value, a Reuters survey has found, highlighting the precarious state of schemes funding the retirements of thousands.

The elite group of companies owed their pension plans a cumulative $245 billion in 2012, up 16 percent from a year earlier, largely due to weak returns from staple investments like stocks and bonds.

But the assets of these pension plans grew by just 11 percent over that same period, extending funding gaps or deficits that run into billions of euros in some cases.

If these funding shortfalls continue to grow at a faster rate than assets, investors and bondholders could lose confidence in the firm's financial security, making it more difficult for companies to raise affordable capital.

And in the worst case scenario, pensioners could also be forced to accept smaller pensions than expected if a company cannot afford to meet its obligations.

The deficits range from $93 million at miner Glencore-Xstrata to 9.7 billion euros at German automaker Daimler but shortfalls of any size can deter investors, raise borrowing costs and weaken balance sheets that look healthy in all other respects.

"The companies that have large pension deficits relative to their market capitalization continue to be in denial about the impact that deficit can have on future debt," said one pension advisor on the basis of anonymity.

Out of the 10 listed companies, eight are sitting on cash piles that could wipe out their pension shortfalls but only two of the companies contacted by Reuters were prepared to discuss their pension scheme deficits or how they might tackle them.

A Daimler spokeswoman told Reuters that filling its 9.7 billion euro deficit was not a "major priority", while a spokesman for one of the 10 companies, who declined to be identified for this report, said it was satisfied with its funding plan.

"There has never been a debate about how we can protect the future of the company by massively reducing our pension deficit," the spokesman said, insisting that the company could easily tap other sources of capital to address any future spike in its pension debt.

The other companies all declined to comment.

At least three of the firms surveyed have dipped into company coffers to trim their pension deficits in recent years but experts say the tactic offers no guarantee of a long-term fix.

Royal Dutch Shell pumped $2.3 billion into its pension plan in 2012, while BP has contributed $4 billion to its funded pension plans in the past three years.

Volkswagen injected more than 3 billion euros of cash into its pension plan in 2012, when the first of the post-war Baby Boomers in its workforce took retirement.

"Companies can't look to fix their pension deficits in one go," National Association of Pension Funds policy advisor James Walsh told Reuters.

"Trustees want to see the pension scheme well-funded but they don't want a company to increase contributions so much that it goes bust."

BLACK HOLE

Pension regulators in Britain and the Netherlands force companies to demonstrate how they can make up shortfalls in the future. But in other European countries like Germany, companies do not have to show how they plan to meet their obligations.

Most European companies have closed pension schemes that offer payments to members based on their final salary in a bid to cap rising pension bills. Most now offer schemes that pay pensions based on employee contributions to a retirement pot over the years.

The median liabilities of all 10 firms expressed as a percentage of market value is nearly 30 percent.

Britain's 350 largest firms paid more than 35 billion pounds into their pension schemes over the last three years but have only reduced total deficits by 4.1 billion pounds to 64.9 billion pounds, a study by consultant Barnett Waddingham shows.

"Once a company has put money into a pension fund, they can't get it out again, so why would they want to put money into their pension pot if the market isn't penalising them for the size of their pension deficit?," said David Blake, director of the Pensions Institute at Cass Business School.

Companies must calculate their future pension obligations using a so-called discount rate based on corporate bond yields.

Four consecutive years of declining interest rates and repeated rounds of central bank money printing have driven down the yields of many higher quality bonds to record lows and as those yields fall, the company liabilities rise.

Some long term bond yields are increasing - but not quickly enough to wipe out deficits while rising life expectancy rates are forcing companies to support workers for longer than expected, compounding the problem for scheme sponsors.

"Some companies have been putting millions into their pension plan in the last five years with little impact on their deficits - effectively throwing money into a black hole," said one pension advisor, who asked not to be named.

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