GERMANY – Chemical giant BASF has announced that it will remove €3.7bn in pension liabilities from its balance sheet and fund them via a contractural trust arrangement (CTA) by the end of 2005.
BASF said the move, which was cleared by its supervisory board today, would improve the “international comparability of its financial reporting”.
“BASF will use its high liquidity position to finance the CTA with the necessary assets. The company will still retain its financial strength to further develop its portfolio profitably, continue a shareholder-oriented dividend policy and re-purchase shares,” the firm said.
A spokesman said the €3.7bn in pension liabilities were mainly related to BASF employees in Germany. BASF Pensionskasse, the firm’s traditional pension fund, is not affected by the revamp.
The spokesman declined to say whether BASF had hired a consultant to advise on the construction of the CTA – one of the biggest this year. “I don’t believe that we give out that kind of information.”
According to industry experts, the next steps in constructing a CTA include the compilation of an asset-liability study, a new strategic asset allocation and then searches for new asset managers.
According to BASF’s 2004 annual report, the asset allocation for the firm’s pension assets – including those from BASF Pensionskasse – was 45% equity, 44% bonds and 9% real estate.
BASF is the latest German multi-national to embrace a CTA for its pension liabilities amid the switch to new international accounting standards. Since last spring, CTAs have been set up at media giant Bertelsmann, engineering group MAN and energy group E.ON.
While expensive to build, CTAs are regarded by international rating agencies as an effective way of fully funding pension liabilities.
Ratings agency Standard & Poor's said its AA-/Stable/A-1+ rating on BASF was unaffected by the announcement.