EUROPE – Commerzbank Securities says underfunded pension plans in the UK and US should be of “major concern” to investors because they represent a movement of wealth from the shareholder to employees.
“The costs and risks to US and UK companies running underfunded pension plans should be of major concern to investors because they represent a transfer of wealth from the shareholder to the employee,” the bank said in a report.
It added that investors should be concerned about the fact that “overly optimistic actuarial assumptions in the valuations of fund assets have understated the funding deficit of many of the already shaky-looking pension funds”. Investors should also be concerned about the “high bias” toward equities in UK and US blue-chip companies’ pension funds.
It said it was becoming concerned about the solvency of US blue chip pension funds and that the underfunding scare is “far from over”.
Commerzbank also commented on the impact of the FRS17 accounting standard which takes a snapshot of a pension fund’s liabilities. It said one result of the standard is to persuade funds to move into bonds. “Pension funds could be more inclined to shift large portions of their equity portfolios into (corporate) bonds,” it said, citing the move by the Boots pension fund to move its entire 2.3 billion pound (3.6 billion euro) portfolio into bonds.
“If corporate bonds can yield enough to meet the pension liabilities, other employers might well follow Boots in their asset allocation and include more bonds in their portfolios.”
Commerzbank stressed that FRS17 “does not alter the true economic health of a pension fund, and as such does not affect the fair value of the company running the pension fund”.
The German pensions industry was under much less threat, the report argues, due to the way it is structured. “Some companies have literally no risk of an underfunded pension liability. Most corporate pension schemes have no, or very little, exposure to the equity market,” it said. Compared to the UK, where schemes are around 75% exposed to equities, around 20% of German fund value is exposed in the same way.
Commerzbank, via its Commerzbank Asset Management unit, has 12.5 billion euros in European pension fund assets under management.