EUROPE - Over 30 major European firms have underestimated their pension obligations by more than 40%, according to research from AlphaValue.

The organisation claimed pension deficits were underestimated by around €300bn at the 430 listed European companies researched by AlphaValue , as employers minimised future salary increases and maximised discount rates.

The analysis, based on calculations of each company’s pension payments in 2008 year-end reports, revealed that conventional estimates of pension deficits for the 430 companies grew by 22% to €280bn. But AlphaValue claimed there is an additional €300bn, or 9% of total shareholders’ equity, that has gone unrecognised mainly through the use of higher discount rates.

The firm noted that in 2008 average wage inflation rate fell from 3.7% to 3.6%, while the average discount rate increased from 5.38% to 5.57%.

AlphaValue - an equities research house - argued while the 30bp improvement in the spread looks insignificant “it is not when applied to €1.1trn of obligations. A rough indication is that this 2008 ‘spread’ saved European corporates about €51bn in extra provisioning”.

AlphaValue suggested that in percentage terms there are 31 European listed firms with pension obligations underestimated by 40% or more, while in value terms the most underestimated obligations for funded pension schemes included a number of UK banks, with Lloyds Banking Group topping the list with an underestimation of €14.2bn.

CompanyFunded obligation (2008)Recalculated obligationUnderestimate
Lloyds Banking Group 18,375 32,617 14,242
Royal Bank of Scotland 32,653 45,966 13,312
British Airways 15,068 25,580 10,512
Siemens 22,654 32,742 10,088
Barclays 18,221 27,928 9,707
Royal Dutch Shell 37,119 45,958 8,838
HSBC 16,955 25,202 8,247
Glaxosmithkline 14,457 22,443 7,986
BT Group 39,212 46,986 7,774
ING 14,219 21,787 7,568
Electricité de France 16,939 23,002 6,063

All information supplied by AlphaValue and all figures in €m.

Pierre-Yves Gauthier, director at AlphaValue, said: “More than one-third of 2008 pensions obligations - some €1.1trn - are recorded at UK companies, as this is where the largest companies operate with the largest defined benefit commitments. The bulk of the ‘not accounted for’ pension deficit is also with UK corporates, especially the banks as they use rather high discount rates compared with non-UK peers.”

Gauthier added while a number of firms have made “sharp corrections” in their valuations in the last few quarters of 2009, he warned that difficult market conditions make it even more important that “consistency be found across European corporates on the use of coherent discount rates in particular”.