DB Liabilities Significantly Reduce European Multinational Plan Sponsor Earnings
30 July 2012 (PLANSPONSOREurope.com) – European multinational plan sponsor defined benefit (DB) liabilities are still causing a “significant dilution” of company earnings and are now larger relative to market capitalisation than in 2006, according to research from Mercer.
The research reveals while corporate earnings have increased since 2008, pension costs now account for around 10% of earnings and pension deficits represent 4.8% of market cap in 2010/11 compared to 2.9% in 2007/8.
While funding levels for the Eurostoxx 600 have remained relatively stable. The overall funding level was 81.7% for 2010/11. Total liabilities increased from €1.17 trillion in 2007/8 to €1.29 trillion in 2010/11 whilst total assets increased from €1.01 trillion in 2007/8 €1.06 trillion in 2010/11.
The report also notes that since the 2008 credit crisis, there has been a notable increase in the size of pension deficits relative to market cap: from 2.9% in 2007/8 to 4.8%% in 2010/11.
Julien Halfon, principal at Mercer and author of a white paper about managing cross-border pension risk, said: “DB pension plans sponsors across the globe are accelerating efforts to manage their pension risk and ultimately transfer it to external parties.
“However, this is a slow process and in the meantime, many companies still do not have proper oversight and governance of pension schemes risk. A company operating in just one market is exposed to a range of risks that need monitoring: investments, contributions, changes in liabilities and changing regulations, policies and strategies. In contrast, a multinational must deal with the compounded effect of all these issues across different regulatory and pension regimes and in a number of currencies. This can introduce significant risk and volatility at the corporate level and can hurt key financial metrics, which are of interest to analysts and rating agencies. Therefore, for multinationals, pension scheme governance and risk management must be considered together.”
“There are several key stages in the establishment of a multinational pension risk management framework,” Halfon continued. “First, companies must be sure who should assume overall accountability for this area. It is crucial that this is seen as the main priority. Establishing ownership leads to the creation of policies and processes which, in turn, leads to the establishment of central and local investment and risk management strategies.
"Implementing regular assessments of changing risk levels within a well managed governance framework must be supported by regular communication with all advisers and internal stakeholders. Not maintaining this oversight will often lead to companies falling foul of changing local regulations or failing to address the pensions challenge.”