Sections

DrKW criticises pension return assumptions

EUROPE – Even though companies should be reducing pension risk by increasing bond exposure they are unlikely to do so due to overly bullish return assumptions for their pension plans, says Dresdner Kleinwort Wasserstein.

Pension deficits for the 185 companies in the FTSE EuroTop300 offering funded plans could be as high as 270 billion dollars, says DrKW in a report called “More pension tension – management reaction or inaction?”

It adds that there is an expectation that companies will reduce their equity holdings or buy bonds to “fill the black hole.”

The report, however, suggests that company managers may be unwilling to make such a transition. Many companies are simply counting on a rise in markets following three years of falling markets, and also need to defend their bullish return on asset assumptions for pension plan assets.

According to the report, the average return on asset assumption for the EuroTop300 is 7.2%, and a wholesale move into bonds could bring this figure down to roughly 4%-5% - returns that management may find difficult to digest, says DrKW.

If returns on assets, or ROA, fall, explains the report, then earnings will fall, and the company cash contributions into pension funds recommended by actuaries will be reconsidered. “If assets are assumed to grow much faster than the liability, then less cash is needed today. Drop that return and near-term contributions rise.”

At a time when companies are desperately searching for profits growth and cash conservation, managers’ reluctance to reduce equity holdings and consequently the ROA is understandable.

In the long run, however, this decision could “lead to disaster for those companies unable to stomach the risk as they compound the problem into the future” says the report. Just because there have been three bear years does not necessarily mean that the fourth will see an improvement.

Warns Dresdner Kleinwort Wasserstein: “Beware of those companies masking the true problem hiding behind fantasy ROA assumptions.”

Have your say

You must sign in to make a comment

IPE QUEST

Your first step in manager selection...

IPE Quest is a manager search facility that connects institutional investors and asset managers.

  • QN-2466

    Asset class: Multi-asset funds.
    Asset region: Global.
    Size: EUR 30m.
    Closing date: 2018-08-16.

  • QN-2467

    Asset class: Search for a broker (mainly ETFs).
    Asset region: Global.
    Size: 250m.
    Closing date: 2018-08-28.

  • DS-2468

    Closing date: 2018-08-24.

Begin Your Search Here