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Deficits account for 5% of European company market cap, says Mercer

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EUROPE - Pension deficits at Europe’s top companies have grown over the last few years relative to market cap and now account for 4.8% of the firms’ market value, a study shows.

Deficits increased to 4.8% of market capitalization in 2010-11 from 2.9% in 2007-08, according to research from consultancy Mercer.

The study analysed reports and accounts for 228 companies listed on the Eurostoxx 600 index, focussing on companies with pension liabilities above €500m and assessing multinational pension exposure in Europe.

Julien Halfon, principal at Mercer, said: “DB pension plan sponsors across the globe are accelerating efforts to manage their pension risk and ultimately transfer it to external parties.”

But this was a slow process, he said, adding that in the meantime many companies still did not have proper oversight and governance of pension scheme risk.

The consultancy said that while corporate earnings had increased since 2008, defined benefit (DB) pensions were still causing a significant dilution, with pension expense now representing 10% of earnings.

Pension funding levels for Eurostoxx 600 companies, however, remained relatively stable, Mercer said, with the overall funding level at 81.7% in 2010-11.

Underlying this, assets and liabilities have fluctuated since 2006, with total liabilities increasing to €1.29tn in 2010-11 from €1.17tn in 2007-08 and total assets rising to €1.06tn from €1.01tn.

Halfon commented that a company operating in one market had several pension risks to monitor, including investments, contributions, changes in liabilities and changing regulations, policies and strategies.

“In contrast, a multinational must deal with the compounded effect of all these issues across different regulatory and pension regimes and in a number of currencies,” he said.

“This can introduce significant risk and volatility at the corporate level and can hurt key financial metrics, which are of interest to analysts and rating agencies,” he said.

For this reason, multinationals had to consider pension scheme governance and risk management together, he said.

In absolute terms, the level of contributions paid by companies into their pension schemes had remained stable over the period, Mercer found, at an average of €43.8bn a year.

The contribution amount had been steady even during time of reduced corporate cash flow, the firm noted. But the ratio of pension contributions to free cash flow had varied considerably between different industrial sectors.

For utilities, for example, contributions in 2010/11 were 28.1% of free cash flow, compared to 3.1% for communications companies.

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