GERMANY – Auto component maker Continental has become the latest member of the Dax-30 equity index to create an external fund known contractual trust arrangement (CTA) to finance pension liabilities.
Continental said its CTA would finance €300m of its €875m in pension liabilities, adding that it had already hired an “external consultant” to draw up an asset-liability study. It did not disclose the name of the consultant nor did it reveal any further details.
The asset-liability study is crucial for the CTA as its outcome determines the fund’s asset allocation. Once that is set, the investor begins the selection of asset managers, which may or may not involve a consultant.
Alan Hippe, chief financial officer at Continental, noted that the CTA would “improve the transparency of our financial reporting, which in turn will reduce our refinancing costs”.
Under international accounting standards, which nearly all Dax-30 firms have adopted, CTAs are considered an ideal way of financing pension liabilities. Rating agencies have also rewarded listed firms with CTAs with better credit ratings.
A spokesman for Continental said that while the firm planned to finance all of its liabilities via the CTA, it had not set a timeframe for doing so. The other €575m in German pension liabilities will, therefore, continue to be met with book-reserve assets.
Last year, Continental paid out €72.1m in pension benefits in Germany and expects to pay €80.6m this year. Continental’s Rechnungszins – or market return needed to safely meet pension liabilities – was put at 3.5% in its report for 2005.
Based in Hanover, Continental employs 80,600 employees worldwide. In 2005, it had operating profit of €1.5bn on sales of €13.8bn.
Other Dax-30 firms that have set up CTAs recently include engineering firm MAN, chemical giant BASF, energy supplier E.ON, consumer chemicals firm Henkel as well as Dresdner Bank and Commerzbank.