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Companies struggle to defuse pensions time bomb

LONDON (Reuters) - Companies are struggling to plug gaping holes in their crisis-scarred pension schemes, risking costly downgrades in already tight credit markets and creating a wildcard for profits this year.

Companies are struggling to plug gaping holes in their crisis-scarred pension schemes, risking costly downgrades in already tight credit markets and creating a wildcard for profits this year. In this April 2006 file photo commuters walk to work over Westminster Bridge in central London. REUTERS/Toby Melville

Analysts will be scrutinising anything employers have to say on an estimated pension deficit of 75 billion pound across the largest 50 multinationals in Europe, as the value of assets accrued by the schemes sags.

“Pension deficit is a debt, but it is a very variable debt that can change quite considerably. If you tweak a few assumptions it can go up or down,” said Gerd Zonneveld, a transport analyst at brokerage Panmure Gordon.

Global pension assets fell 18 percent to $25 trillion (17.6 billion pounds) in 2008 from $30.4 trillion a year earlier, the largest decline for years, industry body the International Financial Service London said on Monday.

Pensions are not normally a closely watched part of earnings statements, but they can make a huge difference when companies are already struggling with the downturn.

A pension shortfall at Canadian telecom equipment maker Nortel NT.TO was seen as one reason behind its recent entry into bankruptcy protection, while defence contractor Lockheed Martin LMT.N cut its outlook because of high pension costs.

Even if not weighing on a company's balance sheet, pension deficits -- which a company is obliged to rectify -- can prove a bone of contention in takeovers, like in British Airways' BAY.Lintended merger with Iberia IBLA.MC.

“We are very conscious of ... how they are going to fund those deficits,” said Collins Stewart analyst Andrew Ritchie.

A pension deficit per se was no reason to downgrade a company, Ritchie said, but he added he was keeping an eye on how a company takes steps to tackle the deficit and to see if the pension scheme was recovering.

Rating agency Moody’s recently warned that a further decline in pension assets in 2009 could “exert significant pressure on credit profiles,” making it more expensive and difficult for a company to raise cash in already tight markets.


Europe’s largest 50 companies could see their joint pension deficit rise to 200 billion pounds, if the yield on bonds used to calculate pension liabilities falls back to pre-credit-crunch levels, consultant Lane Clark & Peacock said.

To solve the problem, companies are closing their costly defined benefit pension schemes -- which guarantee employees a fixed pay-out -- offering cheaper and less volatile defined contribution alternatives.

Pension schemes are effectively creditors of a company, and some are drawing up contracts to give pension schemes special creditor status -- an arrangement that can antagonise other creditors, according to pension advisors.

A few employers are even considering benefits shakeups, replacing pension schemes with other benefits that carry no long-term liabilities.

“Companies are saying: Whatever we do, we must avoid the pension scheme going below a certain amount or we will be re-rated”, said Matt Wilmington, a senior pension adviser to companies at consultant Hewitt.

Even if they are not downgraded, some employers are not able to address the pension deficit by pledging assets -- because the promise itself would impact their chances of getting credit.

They are likely to resist calls for extra funds at least in the short term, said Deborah Cooper, principal at consulting firm Mercer, something that is allowed to a certain degree in some jurisdictions such as the Netherlands.

Other countries such as the UK or Ireland do not permit the practice, though in the UK, both pension fund trustees and regulators have been willing to give sponsors more time to make the deficit good, she said.

“Most regulatory frameworks in Europe are flexible and we have to expect employers to push the flexibility to the limit,” Cooper said. “There will always have to be some sort of pension provisions, but it makes sense to be more creative.”

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Editing by Chris Wickham