EUROPE – Morgan Stanley’s European pensions vice president Jeroen van Bezooyen discusses methods of assessing pension risk in European companies in the January edition of the IPE magazine.
Van Bezooyen acknowledges that it is difficult to compare aggregate pension funding positions of European corporates, and even whether a funding deficit is in itself a problem. This is especially the case for multinational companies, he says.
But he says there are a few statistics analysts can use to help get an idea of a company’s position.
First, is the aggregate funding position. “The immediacy of the problem depends on the regulatory regime, but it is a reasonable predictor of cash flow.”
The second method is to take the relative size of a pension fund, on the basis that pension issues are more important the larger the pension scheme is in relation to the sponsoring company. “We measure this as a the ratio of pension liabilities to company market capitalisation.”
Van Bezooyen says: “The higher this ratio, the more impact pension contributions are likely to have and the more exposed a company is to changes in the pension asset-liability position.”
Morgan Stanley has taken a sample of large European corporates. “For the companies in our sample, pension liabilities are, on average, about 40%-50% of company market capitalisation at the end of 2001.”
The ratio ranges from Vodafone at 0.4% to Corus (390%) and KLM (777%).
The third way that van Bezooyen suggests to analyse pension liability is to look at pension scheme maturity. “The more mature the scheme, the shorter the time horizon to make up deficits.” Although difficult to measure, Morgan Stanley uses the ratio of interest cost of pension liabilities to service costs – in the form of the annual cost of pension promises accrued over the year.
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