By Sarah Mortimer
LONDON Aug 15 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
"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
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."
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.