UK - More than a third of CFOs and treasurers believe their company is at financial risk from its pension scheme deficit.
According to a recent survey by Mercer Human Resource Consulting, 39% think their pension deficit presents a moderate or severe risk to credit ratings, 33% believe it poses the same risk to liquidity, and 30% perceive a similar threat to their profits.
Tim Keogh, worldwide partner at Mercer, commented: While most companies are at limited risk from their pension scheme, there is a significant minority for which a deficit has become a major financial issue.
“Companies in this category need to be sure they are managing pension risks appropriately and that shareholders are comfortable with the risks they are taking.
Of those surveyed, 47% believe shareholders would prefer pension scheme assets to be invested largely in bonds rather than equities, to provide greater stability, even though this could have a detrimental effect on pension contributions and profits.
By contrast, a separate Mercer survey found that few companies appear to listen to this desire, quoting the median pension scheme exposure to equities in the FTSE 350 companies as 67%, while 95% of companies have exposures of at least 30%.
When asked how they would assess the pension deficit of companies they were looking to buy, 61% told Mercer they would use an objective measure like FRS17 or buyout cost rather than the shortfall declared in the triennial valuation, which is usually lower. Despite this, only 8% believed their own investors would use such a basis, the survey found.
It also reported that approximately 18% of companies have either issued debt or taken additional bank loans to reduce their pension scheme deficit, with a further 31% having considered the option before deciding against it.
Borrowing to fund a pension scheme deficit should be broadly credit neutral as it involves paying back one loan by raising another, arguably on better terms because of the tax advantages. So, it should have no impact on analyst and credit ratings, said Keogh.
The survey was completed by 51 CFOs and treasurers in the FTSE 350 companies.
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