EUROPE - The discount rates used by some of the world’s largest listed companies varied wildly last year when measuring the value of their European pension funds for accounting purposes, according to a report by Lane Clark & Peacock.
The consultancy firm reviewed the final reports of all FTSE Global 100 companies for the year 2008 and acknowledged pension liabilities and asset valuations, as defined to meet IAS19 accounting rules, cannot be compared easily as a wider range of long-dated high quality corporate bonds - usually AA-rated - were used to value their pension funds last year than in 2007.
More specifically, the European Pensions Briefing Report 2009 showed UK and European companies in the main chose to select a discount rate of between 5.8% and 6.59%, although the full range of rates selected swung from less than 5% to 6.59%. This was a significant change from 2007 accounting when the bond rates selected were largely priced at between 5.2% and 5.8%.
This also reflected the leap in bond prices experienced last year which widened the collective pensions liabilities of the 100 companies from a deficit of €180bn in 2007 to €230bn. That said, the improved bond price also helped to reduce the net pensions deficit by €10bn to €220bn by the end of September 2009.
European companies were far more realistic about the returns they could expect on pension assets compared with their US counterparts, the European Pensions Briefing 2008 report showed.
At least 30 of the European companies analysed indicated in their reports that they were less pessimistic about the returns to be had, particularly in relation to equities, as they predicted returns would generate less than 6.5% on assets. The majority of US companies predicted they would still see returns of 8% or more.
And of the 22 companies which provided predictions on equity returns - 18 of which were Europe-based - nine said they expected to return between 7.75% and 8.24% on equities. LCP said assuming an additional 1% per annum return from equities would have added €3.3bn to the total reported 2008 profits of the companies surveyed.
Further analysis of those reports revealed Deutsche Bank and National Grid were the only companies in Europe to have more in pensions assets than their liabilities. DB had €8.7bn in assets and almost €8.2bn in liabilities while National Grid had almost €20.9bn in assets and €20.7bn in liabilities, according to 2008 reports.
National Grid also had the largest equity allocation at 47% in its pension fund compared to its market cap, while Banco Santander paid the largest employer contribution of €706m compared with its pensions servicing costs of €185m.
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