German energy giant E.ON is to remove up to €5.4bn in pension liabilities from its balance sheet and finance them via an external fund.
The construction of the fund, known as a contractural trust arrangement (CTA), is to be completed in 2006. E.ON announced the move with its recent first-half results.
E.ON chief financial officer Erhard Schipporeit says the decision was mainly motivated by a desire to improve the firm’s transparency.
Now was a good time for the move, due to E.ON’s current liquidity – it has around €12bn in liquid assets.
E.ON did not reveal any further detail on the CTA, such as the future asset allocation.
Even with the CTA, E.ON’s underlying pension commitments to its former and current employees are, along with the tax treatment, not expected to change.
E.ON is the latest German multinational to embrace a CTA for its pension liabilities amid the switch to new international accounting standards.
Names setting up CTAs include Deutsche Bank, Siemens, Deutsche Lufthansa, Bertelsmann and MAN.
While expensive to build, CTAs are regarded by international rating agencies as an effective way of fully funding pension liabilities.
Standard & Poor’s welcomes the move, saying it regarded it “as a conservative use of funds that improves the transparency of E.ON’s asset allocation”.
And Fitch analyst Steve Durose says: “Even after this huge investment in pensions, E.ON will still have one of the strongest balance sheets of any European utility.”
Both agencies kept their ratings unchanged.