Pension deficits skyrocket for Dutch multinationals under IFRS

NETHERLANDS – Dutch multinational companies' combined pensions deficit has skyrocketed from €7bn to approximately €30bn in 2012, according to Mercer.

Using International Financial Reporting Standards (IFRS), the consultancy analysed the returns on high-grade credits in the euro-zone, the UK and the US, as well as the average return based on pension investments of listed companies.

According to Mercer, the rising shortfall means the funding of pension liabilities for the 35 listed Dutch multinationals has dropped from 94% to 80-85% in 2012.

Bas van Boesschoten, defined benefit risk leader at Mercer, said: "The liabilities under IAS19R are now larger than under the Dutch financial assessment framework FTK, as they include the expected indexation."

A larger shortfall could trigger a downgrade of the companies' ratings and, as a consequence, increase their financing costs, he said.

"In the past," he added, "these kind of losses could be spread. But since the introduction of the reviewed IAS19 rules on 1 January 2013, profits and losses must directly be attributed to a company's assets."

The initial IAS19 for listed companies has been in force since 2005.

Mercer estimated that falling interest rates and IAS19R would increase Dutch multinationals' pensions obligations by more than €2bn in 2013.

In part, this is caused by equating the expected returns on pensions investments to the accounting rate under IAS19R, which leads to lower expected returns, it said.

According to the consultant, the funding drop is mainly caused by considerably lower expected returns on credits, the criterion for accounting pension liabilities under IAS19.

In the euro-zone, the accounting rate for IAS19 calculations dropped by approximately 150 basis points in 2012, it said.

However, Mercer noted that, considering different interpretations, companies are factoring in a decrease of between 110 and 190bps.

Under IAS19R, listed companies must provide additional information about their expected pension contributions and additional pension payments for the coming financial years, in order to provide a better insight into risks from pension arrangements.