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Measure to show the shape of corporate pensions

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  • Measure to show the shape of corporate pensions
  • Measure to show the shape of corporate pensions

UK - Consulting firm Hymans Robertson has unveiled what it hopes will become a recognised ‘safe' method for assessing pensions risk to a company's financial status.

A series of four metrics have been created for the PenSafe Report which Hymans Robertson believes measure through a diamond-shaped image the risks one company's pension fund could carry compared to a chosen median, and by using data from the company's published profit and loss data.

More specifically, the aim of the SafeShape model (pictured, top right) is to show how a company's deficit, liabilities, costs and risks of its defined benefit pension arrangements could impact its earnings potential, as officials believe there is currently no way to compare companies through existing accounting practices.

The model is broken down to consider four elements:

Security: to give an indication of how material the pensions deficit is, the restated deficit is divided by the firm's market cap, and then multiplied by 100p to be expressed as pence in the pound of a company's market cap; Affordability: expressing by dividing the stated pensions deficit by the company's earnings, and multiplied by 365 to express affordability as the number of days it would take the company to repay the deficit from its earnings; Fluctuation: the unhedged liabilities are measured by subtracting the pension fund's assets which move with the liabilities - ie restated corporate bonds - and dividing it over the market cap to be expressed as pence in the pound of a company's value, and Expenditure: how much a company is contributing to their DB arrangements is divided by company earnings to express how many days it would take to earn the money paid as pension contributions.

Once all four calculations are made, they can then be plotted in a diamond to show how big an impact the pension could have on a corporate's earnings potential, and the smaller the diamond the lower the stated risk, according Clive Fortes, head of corporate consulting at Hymans Robertson.

Because all companies are currently able to individually choose the "high quality corporate bonds", as well as the time, from which to calculate their IAS19 discount rate, Hymans Robertson has itself analysed all financial reports from the UK's FTSE 350 listed companies in 2008 and restated what it believes the spot price of the discount rate should be if all were assessed at the same level.

The FTSE 350 median under IAS19, for example, suggests the deficit should be expressed as 0.1p but Hymans Robertson's restated calculations suggest it should in fact be 12.3p, while the number of days a company's earnings are needed to repay the deficit widens from three days to 224 days.

"Companies need to take a much more active interest in the way they manage their pension strategies," said Fortes.

"It is inevitable some companies will fail and the pension burden will be too much for some companies. But IAS19 does not give the risk and a proper measurement. It is excellent as a common currency from which to compare companies. But over the last 18 months the yields have risen 200bps relative to government bonds."

Chris Hurry, an actuary at Hymans Robertson, also argued: "There is not a common and reliable way to make the comparison between a company's pension burden. So we have tried to come up with a common language allowing a company to be compared with one another, and with one sector and another.

This data will then be used every six months and published as PenSafe diagrams to show how M&S fares in terms of pensions risk to Tesco (see image, below), for example, and how the retail, industrial and banking sectors compare.

Given the current state of the markets, conditions are expected to worsen and the risks companies are expected to widen over the next year as over the last year alone the median ‘security' metric calculation of FTSE 350 companies had already widened from 2.4p at 31 December 2007 to 12.3p by 31 December 2008.

At the same time, however, the amount of money companies contributed last year had already decreased compared with earlier periods, as the three-year analysis of corporate pensions expenditure found it was worth 24p in 2006 but had reduced to just 20p by last year, noted Hurry.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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