Morgan Stanley survey reveals firms with largest pension liabilities
EUROPE - Alcatel Lucent, the French IT company, has the largest net pension liabilities as a percentage of its market capitalisation - 139.3% - of any company in Europe excluding the UK, according to a report from Morgan Stanley.
Second-placed in the ranking was Delta Lloyd, the Dutch insurance group, with 120.9%, while Germany's Salzgitter steel company recorded 107.8%.
Other names in the top 10 included Thyssen Krupp, Tui and Lufthansa of Germany, Fiat of Italy and Smurfit Kappa Group of Ireland.
In the UK - where 84% of UK pension schemes are now reportedly in deficit - travel group Thomas Cook had the highest ratio, with net pension liabilities reaching 218.8% as a percentage of market capitalisation.
Premier Foods came second with 161.7%, followed by Dixons Retail with 45.5%.
To allow investors to hedge pension risk, Morgan Stanley has created two baskets containing those stocks in Europe (MSSTEUPL) and the UK (MSSTUKPL) with the biggest pension deficits as a percentage of market capitalisation, and of at least 15%.
Both baskets are tradable on Bloomberg.
The report said: "Both baskets have displayed high levels of volatility since mid-2008, and would have underperformed their benchmarks by 27% since September 2009."
The report cited lower bond yields, improving mortality rates and lower asset prices as reasons for the deficits.
And it warned that the upcoming IAS19 pension accounting changes could have a significant impact on corporate earnings and balance sheets.
Under the new rules, effective from 1 January 2013, companies will be barred from using the 'corridor approach', which allowed them to keep losses related to pension schemes off their balance sheets.
Furthermore, the long-term expected rate of return on pension assets will have to be assumed to be in line with the discount rate.
But the report had some good news, both for investors and the companies themselves.
"Given that the stocks in our two baskets have underperformed significantly in recent years due to falling core bond yields and weak equity markets, logic suggests they could also be material beneficiaries from increasing risk appetite and a reversal in these trends," it said.
"With forward and trailing valuations of the two baskets at historical lows, bullish investors could use these names to position for a further rally."