EUROPE - Despite positive performance from the equity and bond markets and a 60% increase in company contributions, the collective deficit of European pension funds only fell 6% in 2004, leaving a gaping deficit of e214bn at year-end, according to research by Dresdner Kleinwort Wasserstein (DrKW).
A research paper published by DrKW European and UK equity strategist Karen Olney on the Euro-top300 pension funds, revealed a mere 6% improvement in funds’ collective deficit last year, compared to 20% in 2003.
DrKW blamed lower bond yields, changing mortality rates and better disclosure as companies prepare to implement the new IFRS accounting standards.
During 2004, DrKW estimates pension assets rose by e54bn and liabilities by e40bn, leaving the end of year net deficit at e214bn.
“A fall of 6% is truly disappointing,” Olney wrote. “During 2004 European and US equities rose by 12% and 10%. That’s not bad, however, lower than the returns for 2003, when European and US equities rose by 15% and 28% respectively.
“Longer duration bonds were the real success story, driving our mixed maturity total bond return to 10% during 2004. But instead of clicking our heels up with glee, we quickly remembered that lower bond yields mean lower discount rates for pension liabilities.”
In the report, Olney said in countries like Italy and Spain, that appear to have only a minor deficit, it is down to the government’s more dominant role in pension provision and a greater weighting in defined contribution plans.
German companies still have the largest deficits, but this is because as a practice they do not fund plans, she added. Instead, they rely on the PSVAG insurance scheme to bail out the plan members of insolvent companies.
“One accounting standard for all (IAS19) should eventually improve transparency and comparability across Europe,” Olney wrote. “All pension liabilities will have to be calculated using the projected-unit-method and this is a major improvement.”
DrKW said the research results were “purely indicative” in nature and not absolute, and used broad assumptions to update the deficits.
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