According to Dow Jones, the enhanced analysis is designed to give the analysts a more complete look at how pensions affect the creditworthiness of the corporations that sponsor them.
Specifically, the enhanced analysis is intended:
- to help undo distortion of a company’s financial picture that results from complicated pension accounting rules
- to give a better picture of companies’ capitalization and measures for protecting cash flow in light of their retirement benefits obligations.
The ratings agency doesn’t expect the initiative to result in a raft of corporate credit ratings changes in the near future, S&P analysts said on a conference call announcing the publication of two agency reports on the matter.
Concern over increasing problems that companies are encountering with their pension plans as a result of heavy stock market losses and other factors prompted the agency to develop the new analysis.
For example, S&P noted that the discount rate used to project future liabiliteis should differ among companies to the extent that they operate in regions with different prevailing interest rates and have different workforce demographics. However, discount rate assumptions vary significantly more widely among companies than underlying differences in these variables would justify, according to S&P.
S&P also noted that a reliance on expected investment returns has drawn harsh criticism of late, as companies have clung to return assumptions that seem aggressive after three years of negative actual returns. Additionally, even without making aggressive investment return assumptions, some firms are reporting sizable net pension credits (that is, the expected return on plan assets more than offsets the other cost components), generally reflecting the significant overfunding of their pension plans., according to S&P.
While overfunded benefits plans are a positive factor from a credit perspective, the advantages may well be overstated by the credits (given, for example, the practical inability of most companies to directly revert the surplus), and Standard & Poor’s takes this into account when arriving at a rating.