Companies with underfunded defined-benefit pension schemes are particularly vulnerable to economic conditions in the eurozone, according to Standard & Poor’s. Defined schemes pay pensions tied to the final salary of their employees. The rating agency blames the sharp fall in long-term bond yields ahead of the imminent start of the European Central Bank’s €60bn-per-month asset-buying programme.
Such yields determine the “discount rate” that pension funds must use to calculate the present value of their liabilities: the lower the rate, the higher the liabilities.
S&P estimates that defined-benefit scheme liabilities will have increased 11-18 per cent, equivalent to €58bn- €92bn, in 2014, driven by the sharp fall in long-term corporate bond yields and only partly offset by the fall in long-term inflation expectations.
S&P analysed the funding of the top 50 European companies it rates that are most exposed, with defined-benefit pension plan deficits greater than 10 per cent of adjusted debt and with outstanding adjusted debt greater than €1bn. At the end of 2013 this group had pension fund liabilities totalling €527bn. Compared with plan assets of €356bn, this meant they had an average funding deficit of just over 30 per cent.
The agency expected companies to continue to manage their pension risk exposure by exploring options such as lowering pension benefits by freezing pensionable salaries, capping future pension increases, increasing the retirement age and closing plans to new and even existing members.
