Large Europeans to pay for optimism on pensions
EUROPE- Companies across Europe may soon start having to inject large sums of money to support their pension funds, as assumptions about the rates of returns for their schemes is proving somewhat overly optimistic, says a survey just published by financial services group, Nomura.
The survey, taken of 39 of Europe’s largest companies suggests they have largely ignored the declines in the stock markets when calculating their pensions liabilities and the average assumption that they would only need to inject 5% of pre-tax profits is way off at the moment.
Applying its long-term growth assumptions, Nomura finds the top five of the 39 alone, representing about 35% of the Dow Jones STOXX market capitalisation for Europe, would need to hive off an average 21% of pre-tax profits to sustain the growth of their pension funds, which Nomura predicts to be around 6.5% in current market conditions.
Individually, the report claims one or two companies could be in serious trouble.
US/German group DaimlerChrysler could be looking at a 41% injection, equivalent to €1.84bn of its latest profits, to prop up its fund, whilst British Telecom would need 25% for its scheme, the UK’s largest.
Nomura says DaimlerChrysler is aware it needs to examine its pensions deficit to ensure the impact on its profits can be reduced to just 10% by 2003.
A spokesman for Nomura in London suggests if companies adopted lower forecast returns, the impact of the market downturn wouldn’t be so great. But he says that isn’t enough and warns that even a strong recovery in the stock markets wouldn’t help long-term.
“Rallies in the markets would reduce the amount companies would need to inject from their profits to sustain their pensions, but if our projections are correct this would only be short-term. The damage is done and in the long-term, we believe companies will need to re-examine their accounts and forecasting criteria to redress the balance.”