The funded status of defined benefit (DB) pension schemes in the US, Canada and the Netherlands has declined since December 2011, says consultancy firm Mercer. However, an improvement is seen in the UK.
The greatest decline has taken place in the Netherlands where funded status has fallen from 96% to 80% due to drops in the discount rate used to measure pension liabilities. According to Mercer, as the interest rate used to measure the liabilities has fallen in the Eurozone, so liabilities across the region have increased – and the picture in the Netherlands is replicated across the Eurozone.
Multinationals with pension obligations in Germany, the Netherlands and Ireland, in particular, will all be facing larger liabilities, says the consultant.
In the UK, the funded status for DB schemes has, despite fluctuations, remained broadly level over the period until September when there was a sharp improvement to 92%. Those in the US have declined from 75% to 73% while those in Canada have declined from 87% to 83%.
The cause of movement in each market is primarily declining discount rates combined with lacklustre asset performance. In the UK, however, the yield on high quality corporate bonds increased and the market implied long-term inflation reduced leading to a 33% reduction in FTSE350 deficits for the month of September.
"There's a multitude of risks facing multinationals with only a single DB scheme," said Frank Oldham, senior partner and global head of Mercer's DB risk group, "but this data shows the scale of the risks and problems facing companies with schemes in multiple geographies. It has not been uncommon for funding levels to move in different directions in some markets over the same month. It is crucial therefore that multinationals can monitor their cross-country exposure and react quickly to capitalise on local opportunities."
An analysis of the Eurostoxx 600, by Mercer in July highlighted the scale of pension risk facing multinationals in Europe. The report showed that while corporate earnings have increased since 2008, DB pensions continued to cause a significant dilution of company earnings and are now larger relative to market capitalisation than in 2006. Pension expense now accounts for around 10% of earnings and pension deficits represent 4.8% of market cap in 2010/11 compared to 2.9% in 2007/8.
"If these deficits continue to worsen," said Oldham, "the cost of maintaining pensions for multinationals or organisations with operations in the UK will shoot up. No executive wants to be worrying more about the pension scheme than the business, so risk management is vital."
First published 29.10.2012
azeevalkink@wilmington.co.uk
