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Heissmann slams “flawed” Deutsche pensions note

GERMANY - Heissmann Consultants' Managing Partner, Alf Gohdes, has slammed the main finding of a recent research note issued by Deutsche Bank, which found that Germany has Europe's highest pension gaps.

Gohdes was responding to research from the German bank – reported last week on IPE - which said large German companies have the largest pension funding deficits as a percentage of their market capitalisation.

He said: "It is time for someone to stand up and expose such findings as flawed. It is incredible, how such statements can be published and extolled by analysts of reputable institutions. And then left unchallenged. If one contemplates what effect such research has on stock prices, one is left to stand in wonder."

"In essence, the Deutsche analysts proceeded as follows: First, they concluded that the British rules for accounting for pensions (FRS17) are the only trustworthy ones for assessing pension deficits.

“They go on to describe the corresponding US-GAAP and IFRS rules as ‘outdated and illogical’. Second, they retrieve extensive information disclosed in the notes to the accounts of Euro Stoxx 50 and Stoxx 50 companies on the basis of which they ‘correctly’ determine the pension deficits according to FRS17.

“Third, on the basis of these results, the shocking truth is ruthlessly revealed: German companies have the largest pension funding deficits as a percentage of market capitalisation.

"Deutsche does not mention, possibly intentionally, that if those German companies were to invest assets equal to the total pension liabilities with a reputable asset manager (such as with Deutsche for example), these deficits would miraculously disappear.

“Consider for a moment, two companies identical in all respects except that the first has a fully funded pension plan, the second has identically invested plan assets, but these are held on rather than off balance sheet because the assets are not legally but only "morally" segregated from those of the company.

“On rational criteria, both companies´market capitalisation would be valued equally. Let's suppose the first is a Dutch the second a German company.

“Now Deutsche's analysts state the German company has the largest pension gap relative to its capitalisation, implying that the German company is in deep trouble. The financial ratio analysed is meaningless and the implication simply nonsense.

"A more meaningful financial ratio could perhaps be debt to capitalisation i.e. the relationship between an enterprise’s debt (total pension liabilities would be part of this) and its market capitalisation.

“Or, alternatively, one could use equity instead of capitalisation."

"In any case, setting off plan assets against plan liabilities in funding environments and comparing this with total liabilities in unfunded environments is quite simply meaningless.

“Some rating agencies have understood this, while a number of diehards (including some rating agencies) are still using net positions."

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