UK - Companies are looking at selling bonds in a bid to plug pension scheme deficits and take advantages of low interest rates.
The move follows the decision by US-based General Motors to issue a massive $17.6bn (£10.9bn) of bonds to help plug its $25bn pension shortfall – and boost profits by between 25c and 45c per share in 2004.
UK companies are now becoming increasingly interested in following suit – taking advantage of favourable tax breaks and very low interest rates.One investment bank revealed that a number of UK firms with hefty scheme deficits are “seriously looking” at the prospect of selling bonds.
And Morgan Stanley executive director Gareth Derbyshire said: “A lot of people looking at bond yields would say that this is still a relatively cheap time to issue debt to finance pension fund liabilities. With the tax incentive in there as well it starts to look very attractive.”
But independent pensions consultant John Ralfe said there would be few companies prepared to put large one-off contributions into their pension scheme.
He said such a move reminded companies that there was a deficit in the scheme – something that many are hoping will just go away.
And he pointed out that while there were some tax breaks in such a move, the accounting advantages that benefited General Motors would not apply to UK firms.
But he admitted: “If a company does want to raise a bond then now is a good time to be doing it because interest rates are low and that is some compensation for the fact that the value of liabilities are that much higher.”
Hewitt Bacon & Woodrow principal Raj Mody added: “Despite significant shortfalls, most schemes do not need an overnight correction.”
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