Record contributions fail to halt global deficit rise
The pension plans of the world’s largest multinationals have fallen further into deficit despite record company contributions, research shows.
The European Pensions Briefing 2010 report by consulting actuary LCP, found the aggregate accounting deficit stood at €160bn (£133bn) at the end of September 2010, up from €150bn at the end of last year.
The increase comes despite companies pumping a record €40bn into their pension plans last year, a 60% rise from €25bn in 2008, in an attempt to bring them back into balance.
LCP said while 2010 has been a good year for investment returns, the gains and deficit contributions have been more than offset by the impact of falling corporate bond yields.
The survey found several companies were burdened with pension deficits of between €5-10 billion. As a proportion of market capitalisation, the companies with the biggest pension deficits were Axa (18%), Boeing (16%) and Daimler (15%).
LCP partner and international practice head Shaun Southern said: ”Over the past 12 months, global pension plans have been hit hard by the fallout from the credit crisis and subsequent economic challenges. As deficits continue to climb, the corporate risks of defined benefit pension plans have never been greater.”
LCP international director Alex Waite added: ”Directors could be lulled into a false sense of security from rising stock market values and higher pension contributions. However, if overlooked, investment and demographic risks could undermine business planning, shareholder confidence and employee relations.
”Further urgent action is still necessary, but this remains achievable if directors take time to engage with the issues they face and seek out appropriate and innovative solutions to their pension exposures.”
Other key findings of the report include:
• While the UK population has only average life expectancy compared with other industrialised nations, companies typically assume that their UK employees will out-live other nationalities. According to company disclosures, UK-based employees retiring today are expected to live to 87 compared with 84 for both US and German-based retirees. This begs the question: ”are companies being overly prudent in the UK, or not considering the full ramifications of demographic change in other countries?”
• Companies will no longer be able to take expected future pension plan asset outperformance above corporate bond returns into account when calculating profits, if proposed changes to the accounting standard IAS19 are implemented. LCP predicts this would have a markedly different impact between locations, with a significant reduction in profits for those with US-based pension plans, a moderate reduction in the UK and a much smaller effect (in some cases an increase) across Europe.
• The briefing considers how companies can best identify, mitigate and communicate pension risk. LCP estimates there is a one in 10 chance that the aggregate pension deficit could grow by at least a further €100bn, to over €260bn, during 2011.
• Payments into defined contribution pension plans increased by an average of 8% in 2009, reflecting the global trend away from defined benefit pension provision.