EUROPE - Over 30 major European firms have underestimated their pension obligations by more than 40%, according to research from AlphaValue.
The organisation claimed pension deficits were underestimated by around €300bn at the 430 listed European companies researched by AlphaValue , as employers minimised future salary increases and maximised discount rates.
The analysis, based on calculations of each company’s pension payments in 2008 year-end reports, revealed that conventional estimates of pension deficits for the 430 companies grew by 22% to €280bn. But AlphaValue claimed there is an additional €300bn, or 9% of total shareholders’ equity, that has gone unrecognised mainly through the use of higher discount rates.
The firm noted that in 2008 average wage inflation rate fell from 3.7% to 3.6%, while the average discount rate increased from 5.38% to 5.57%.
AlphaValue - an equities research house - argued while the 30bp improvement in the spread looks insignificant “it is not when applied to €1.1trn of obligations. A rough indication is that this 2008 ‘spread’ saved European corporates about €51bn in extra provisioning”.
AlphaValue suggested that in percentage terms there are 31 European listed firms with pension obligations underestimated by 40% or more, while in value terms the most underestimated obligations for funded pension schemes included a number of UK banks, with Lloyds Banking Group topping the list with an underestimation of €14.2bn.
| Company | Funded obligation (2008) | Recalculated obligation | Underestimate |
|---|---|---|---|
| Lloyds Banking Group | 18,375 | 32,617 | 14,242 |
| Royal Bank of Scotland | 32,653 | 45,966 | 13,312 |
| British Airways | 15,068 | 25,580 | 10,512 |
| Siemens | 22,654 | 32,742 | 10,088 |
| Barclays | 18,221 | 27,928 | 9,707 |
| Royal Dutch Shell | 37,119 | 45,958 | 8,838 |
| HSBC | 16,955 | 25,202 | 8,247 |
| Glaxosmithkline | 14,457 | 22,443 | 7,986 |
| BT Group | 39,212 | 46,986 | 7,774 |
| ING | 14,219 | 21,787 | 7,568 |
| Electricité de France | 16,939 | 23,002 | 6,063 |
All information supplied by AlphaValue and all figures in €m.
Pierre-Yves Gauthier, director at AlphaValue, said: “More than one-third of 2008 pensions obligations - some €1.1trn - are recorded at UK companies, as this is where the largest companies operate with the largest defined benefit commitments. The bulk of the ‘not accounted for’ pension deficit is also with UK corporates, especially the banks as they use rather high discount rates compared with non-UK peers.”
Gauthier added while a number of firms have made “sharp corrections” in their valuations in the last few quarters of 2009, he warned that difficult market conditions make it even more important that “consistency be found across European corporates on the use of coherent discount rates in particular”.
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