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S&P slams new German pension ratings report

GERMANY – Standard & Poor’s Rating Services has criticised a new academic report on the treatment of pension liabilities by credit rating agencies.

S&P says the report – which proposes that ratings agencies use an ‘on-balance sheet’ approach - “fails to understand or properly represent” its methods.

The report, by Prof. Dr. Wolfgang Gerke of the Friedrich-Alexander University of Erlangen-Nuremburg and Prof. Dr. Bernhard Pellens of Ruhr-University Bochum, was commissioned by ThyssenKrupp, Linde and Deutsche Post.

Each has come under ratings scrutiny from S&P because of their pension arrangements.

“The core message of the report is that when considering pension plans in the rating process, all risks should be taken into account,” the report found.

“In the case of differently funded pension plans, none of the methods used by the big three rating agencies meet this requirement in full.”

It said the agencies use an off-balance sheet approach to adjust the capital structure of companies or compare companies with another based on different – on-balance sheet and off-balance sheet – approaches.

The professors’ report recommends the on-balance sheet approach – which is different from the off-balance sheet way of the “Anglo-Saxon world”.

“The authors therefore propose a second-best method to take the specific features of funding strategies into account in the off-balance sheet approach.”

S&P responded, saying Gerke and Pellens’ paper “fails to understand or properly represent Standard & Poor's methodology, which has been expressly designed to ensure fair and consistent treatment of pension liabilities worldwide, regardless of the funding strategy and level of risk of an issuer's pension scheme”.

S&P said the report's suggested approach “would distort the true picture of pensions liabilities and create an uneven treatment of their impact across funded and unfunded schemes”.

The three companies were among a group of leading European companies that S&P put onto negative credit watch due to their unfunded pension liabilities in February last year. The move drew widespread criticism.

S&P says its rating criteria “are fully compatible with the German pension system”.

“Standard & Poor's is comfortable that its current methodology achieves appropriate comparability by bringing onto the balance sheet the net liability for unfunded pension obligations and adjusting earnings and cash flows to better represent the underlying dynamics of these obligations.”

It added that it uses qualitative and quantitative methods for analysing pension liabilities.

ThyssenKrupp’s chief financial officer Stefan Kirsten said the professors’ report shows that the company was “being disadvantaged by one rating agency in the comparative assessment of pension plans".

He said that applying an off-balance sheet approach to ThyssenKrupp would see around 25% of the pension provisions added to equity. "In the case of ThyssenKrupp that's around 1.8 billion euros which should be added to equity in the rating process."

The 143-page report “Pension provisions, pension funds and the rating of companies – a critical analysis” is online at: ftp://ftp.iur.rub.de/pub/pensions/gutachten-e.pdf

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