UK - The UK public equity market does not appear to treat FRS17 pension deficits as a debt of the sponsoring employer, unlike UK private equity and debt markets, a Punter Southall report has found.
The report, entitled “The Market Value of Pension Liabilities”, aimed to determine how the various UK capital markets price a pension obligation in respect of a defined benefit (DB) scheme.
It concluded that FRS17 deficits are probably not fully recognised in the UK equity market’s valuation of a company and that the UK equity market reacts indifferently to most pension related issues.
The report said a significant implication of this was that it results in a weakening of the market for corporate control with pension funds acting as a defence against private equity take-overs.
Unlike the public equity markets, private equity markets do generally consider a pension deficit to be a debt of the sponsoring company said the report.
The research found that two thirds of the investment professionals at private equity houses surveyed had abandoned deals due to pensions problems and it warned that executives with share options have an incentive to under fund their pension scheme knowing that the equity market will forgive a pension deficit but not a foregone dividend. Paul Geeson, principal at Punter Southall Transaction Services, said: “If FRS17 deficits are not fully recognised in UK equity market valuations of a company, then arguably there is a possibility that the shares of companies with a DB pension scheme may be overvalued and as such, investors might be wary of investing in companies with significant deficits.
“For some investors, such as pension funds, there is an additional reason for avoiding such investments in that these companies are likely to suffer poor performance due to their large pension liabilities just when the pension scheme needs them to perform well.
“For others, however, companies with large pension deficits may prove to be an attractive investment opportunity (whether in a long or short position) if they believe the market is taking an incorrect view on the pension.”
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