GERMANY -German companies with pension fund shortfalls are more at risk of seeing their credit ratings come under pressure than companies in other European countries, according to a report from Dresdner Kleinwort Wasserstein in London, that claims pensions obligations to have debt-like characteristics.
Dresdner analysed the pension fund status of 47 companies that issue bonds, finding only six to have fully funded schemes. The biggest funding shortfalls were found in German companies with significant foreign operations.
In the German system, companies are not required to hold any specific assets against pension obligations. The position of the employee is protected against an insolvent employer through an insolvency insurer (PSV). Employers pay premiums for this institution that will ensure pensions will continue to be paid in case of insolvency.
The problem arises when German companies have foreign operations, as they must abide by the pensions regulations of that country, and therefore are required to fund pension liabilities.
Out of the 47 companies surveyed, General Motors Corporation and German companies RWE, Volkswagen and E.ON had the most significant pension funds shortfalls.
Dresdner believes large funding deficits to be a credit negative factor, and debt investors are beginning to take pension obligations into consideration. That said, Dresdner feels it is very difficult to obtain an accurate view of the pension situation across the corporate sector.
“The limited international standardisation of pension funding and accounting for pension liabilities make it very difficult to compare between countries and even individual companies.”
Furthermore, pension fund shortfalls could be temporary, disappearing when equity markets improve. With this in mind, Dresdner does not expect Standard & Poor’s survey of pensions liabilities to result in widespread downgrades. But the report concludes: “ we would prefer companies with fully funded pension obligations over those with a funding shortfall, reflecting that unfounded pension obligations need to be funded at some point.”
S&P announced it would be conducting a survey of pensions liabilities at the beginning of August, and would downgrade the credit ratings of companies in Europe with pension funds that have large deficits.