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.
Professional Pensions is looking to update its list of pensions master trusts in the UK ahead of authorisation. Can you help?
RPMI Railpen is in the next step in the journey towards achieving cost disclosure. Victoria Bell tells Stephanie Baxter about taking part in the Cost Transparency Initiative's pilot phase
Interserve's numerous defined benefit (DB) schemes have retained a sponsor link after the company entered into administration and was sold.
Chris Hannon has been named chairman of the Railways Pensions Trustee Company after a unanimous vote of approval from its board last week.