EUROPE - Companies with heavily under-funded pension schemes could face increased pressure on their credit ratings as investors become more wary due to badly performing stock markets.
A new report by investment bank Dresdner Kleinwort Wasserstein states that under-funded pension schemes have debt-like characteristics and concludes that these deficits are becoming more of a negative factor for credit ratings.
Rik Fennema, director of credit research at Dresdner Kleinwort Wasserstein, said that clients have been asking more questions about the affect of underfunding, adding: “It is a factor of relevance, but is it something which is of immediate concern? Well, in a lot of companies it isn’t. But for companies which have tight liquidity situations it could cause a problem because in the end it is a liability which will have to be paid at some point.”
However, Fennema added that the problem would become less serious as companies moved over to defined contribution offerings.
In the report, Dresdner analysed the pension funding position of 47 companies that issue bonds. Of those only six had fully funded pension schemes - General Electric, Phillips Electronics, Unilever, Corus, Dow and FKI. It was also noted that German companies, which are not required to reserve assets against pension liabilities, could be more vulnerable to ratings pressure.
Eight of the issuers in the sample were underfunded in excess of one year’s EBITDA - ThyssenKrupp, Rheinmetall, RWE, ABB, MG Technologies, Eon, Rhodia and BASF. But importantly, RWE has an internal policy of holding financial assets on its balance sheet to cover liabilities while ABB uses a lower discount rate.
Standard & Poor’s is compiling underfunding data in order to see how it can be used in credit rating analysis but as yet has not published any statistics.
Most respondents in this week's Pensions Buzz do not think businesses should be able suspend AE contributions if in financial distress.
Former BHS owner Dominic Chappell has lost the appeal against his section 72 conviction and sentence for failing to hand over information to The Pensions Regulator (TPR).
This week's top stories include Marsh and McLennan Companies agreeing to buy JLT, and the home secretary calling for AE to be scrapped in a no-deal Brexit scenario.
Lesley Titcomb says the watchdog wants closer interactions with pension funds to spot problems sooner and act before having to use its more stringent powers