LONDON - Europe's largest corporate pension schemes are suffering from unfunded liabilities totaling €257 billion, a report from stockbroker Dresdner Kleinwort Wasserstein estimates.
The estimate is based on European company filings as of Dec. 31, 2001, and assumes a 15% drop in the market since then and a discount rate one percentage point lower.
"They are very realistic assumptions, given the markets are down further than that," said Karen Olney, the European equities analyst who wrote the report.
The report also cautions that most European companies, like their U.S. counterparts, have extremely optimistic return assumptions and higher-than-expected discount rates on future liabilities.
Ms. Olney found the average return assumption was 7.2%, with a high of 14% for SABMiller PLC, London. Other high assumptions were reported by Dutch telecommunications carrier KPN NV, Groningen (9.5%); and Thyssen Krupp AG, Duisburg, Germany (9.2%).
Discount rate assumptions averaged 6.1%. That's about one percentage point over the return on AA-rated corporate bonds, the benchmark most European regulators suggest pension schemes stick to when calculating discount rates, which judge the present value of future pension liabilities.
"Many companies were well above" the 6.1% average, Ms. Olney said. "When this falls by one (percentage point), we assume the liability increases by 10%."
The most aggressive discount rate assumptions were SABMiller, with 13%; money management firm Old Mutual PLC, London, with 8.9%; and mining group Anglo-American PLC, London, with 8.2%.
"People have really got to return to reality and notch down these assumptions (because) they will filter through to income statements," Ms. Olney said.
An example is German auto manufacturer Daimler Chrysler AG, Stuttgart, whose pensions shortfall DWK estimates could rise to €9.9 billion this year, assuming a one percentage point reduction in the company's discount rate assumption.
Its 9% return assumption is way too high for long-term returns, according to Christian Schlenger, managing director with investment consulting firm Alpha Portfolio Advisors GmbH, Bad Soden, Germany.
"That strikes me as overly optimistic, or even wishful thinking," he said.
Lowering assumptions
Many European companies are lowering assumptions, said David Pauls, a consulting actuary with Watson Wyatt Worldwide, Zurich. And, many have already boosted contributions in order to make up some of their shortfalls.
Siemens AG, Munich, the German electronics group, last month surprised the market with an additional €800 million contribution to the company's pension schemes. This was on top of the €1.8 billion cash contributed earlier in the year (see related story on page 14).
Peter Bakker, the chief executive of Dutch postal group TPG NV, Groningen, told investors the company would have to pay €70 million per year into the company pension scheme, which had accumulated a shortfall of €206 million. He hasn't said whether the group will notch down its return assumption of 9.5% - an act that would make the deficit, and the required cash contribution remedy, worse.
Beverages group Allied Domecq PLC, Bristol, England, announced in October it had increased pension contributions by L16 million per annum. Executives at Anglo-Dutch engineering firm GKN PLC, Redditch, England, last month told investors GKN's pension deficit had increased to "in excess of £700 million," and that contributions would be increased to £45 million per year to cover the cost.
Watson Wyatt's Mr. Pauls expects other European firms to cut their assumptions and announce increased pension expenses next year, too.
But he acknowledged: "There is a reluctance. There is a knowledge of what will happen to the P&L statements. The pressure is there to not do anything or to keep the change to a minimum."
