EUROPE – Dresdner Kleinwort Wasserstein says the combined pension deficit of Europe’s largest 300 companies has fallen just six percent to €214bn.

“During 2004, we estimate pension assets rose by €54bn,” DrKW European and UK equity strategist Karen Olney said in a research note. “But liabilities, too, rose by €40bn, leaving the end-04 net deficit at €214bn.” The estimate is six percent lower than the actual deficit of €227bn recorded at the end of 2003.

“A fall of only six percent is truly disappointing,” Olney said.

“Pension deficits are a moving feast as markets oscillate, mortality rates change and companies make some one-off contributions.”

Olney calculated the estimated deficit by taking total pension assets and liabilities from company annual reports and updating them to take account of market movements and discount rates. “Our results are purely indicative in nature and highlight that this issue is still very much alive.”

“Pension contributions have gone up by 60% (as last reported) so management have been making an honest effort. Unfortunately lower bond yields and worsening mortality rates means the reported 2003 deficit remained at €227bn.”

Olney states that two years of strong markets and increased contributions have seen pension deficits fall by about a quarter. “However, if markets continue to trade sideways, the deficit could be around for a while.”

“We expect a world of lower numbers, namely the ice age to continue.”

The note also warns that new accounting standards could lead to larger pension liabilities and lower corporate dividends.

Noting that under the new IAS19 standard the income statement gets a positive boost from the return on asset assumption which is multiplied by the pension assets – as well as a boost from lower interest costs.

“The impact on this year’s income statement could be positive, but the lower discount rate means a fatter liability.”

And the research points out that dividends could be frustrated if the entity responsible for paying a dividend suffers a hit to the balance sheet.