German and French multinationals with a UK subsidiary could be almost as exposed to equity risk via their schemes’ equity holdings as they are to the performance of their own subsidiary companies, according to new research.

The two surveys, which cover German and French companies with UK subsidiaries running a defined benefit (DB) scheme, were carried out by consultancy Barnett Waddingham.

The research is intended to highlight levels of risk, contributions and deficits within the DB schemes of UK subsidiaries of parent companies in the two countries, and to analyse how these arrangements reflect on their business as a whole.

The surveys, using the latest financial statements (mostly as at 31 December 2014) plotted scheme equities as a percentage of shareholder funds against the percentage of scheme assets invested in equities.

Out of 22 German companies with an aggregate £26.9bn (€38.3bn) in UK pension liabilities studied, two-fifths had UK schemes with an equity component greater than 100% of shareholder funds.

For six schemes, this component was more than 300%, even though most of these schemes have a relatively modest equity exposure (under 50%).  

The relative equity exposure for French parent companies was less dramatic.

Even so, one-third of the 18 companies included – with UK pension liabilities of £21.4bn – had a UK pension scheme equity exposure that was more than 100% of shareholders’ funds, the highest being more than 200%, again most of these for an equity exposure of under 50% within the scheme itself.

Andrew Vaughan, a partner at Barnett Waddingham, who led the research team, said: “If this position is deemed undesirable, then the schemes’ holdings in equities could be reduced, in exchange for assets more closely aligned with the liabilities, such as bonds, property or liability-driven investment funds.

“However, such a change could come with a significant increase in the expected cost of providing benefits under the scheme.”

The surveys also highlighted the higher level of contributions paid into schemes relative to the average for the schemes of FTSE 350 companies, which the researchers describe as “surprising”.

For UK subsidiaries of German companies, the total contributions paid last year – for past service deficit and current service – represented 23% of total staff costs, versus a corresponding figure of around 6% for FTSE 350 companies.

For UK subsidiaries with French parents, total contributions paid last year represented 20% of total staff costs.

In both cases, the average funding level of the UK schemes is slightly higher than the FTSE 350 average.

Another survey finding is that, while UK subsidiaries produce on average 2% of the global revenue of their German parents, they account for an average of 15% of both global DB liabilities and contributions.

For French-owned UK subsidiaries, the UK share of global revenue is 6%, while UK pension schemes account on average for 24% of global DB liabilities, and 35% of global contributions.

Topics