When the information necessary to properly evaluate a particular pension is not present, analysts then are left with little choice but making additional estimates and assumptions, leading to varying results. These “adjustments are necessary,” the S&P said, when comparing rated companies for their pension obligations.
In an 18-page report, “Navigating the International Pension Accounting Maze”, S&P said that an awareness of the differences is “critical” for credit analysts. Overall, the ratings agency has identified six main areas where accounting rules diverge:
- whether and how pension liabilities are presented on the balance sheet
- whether pension obligations are offset by plan assets
- how pension costs are presented on the income statement
- whether “smoothing” is permitted
- how the discount rate is determined
- whether a pension surplus is an asset.
S&P says the exact amount of pension liabilities is not known on any balance sheet date “because pension liabilities are based on highly selective assumptions” about mortality rates, staff turnover, retirement dates, and discount rates.
S&P Under Fire
The agency’s coverage of European pensions attracted a lot attention to the firm as of late. In February, S&P warned it might downgrade a dozen European companies because of pension liabilities (See Pension Woes Pop Up Across the Pond).
Then in March the agency said it “views unfunded liabilities relating to defined benefit pension plans and retiree medical plans as debt-like in nature.” This approach was then criticized by various rating agencies and asset managers. One such criticism came from BNP Paribas. In a European Utilities and Pensions research note, the French bank said that although it recognizes S&P’s point in respect to the inflexibility of pension payments, it is “not persuaded by the arguments used in S&P’s complicated approach to the subject.” Instead, the report says BNP has “more sympathy with Fitch’s approach to this difficult area of analysis”(See BNP Paribas Calls Out S&P Credit Analysis ).