The pension deficits at 430 of Europe's largest public companies could be underestimated by about €300 billion ($449 billion) as of year-end 2008, according to a report by AlphaValue, an independent equity research firm.
Unfunded obligations fell about €23 billion in 2008, according to the report. Companies in Europe all have different ways of calculating pension liabilities, some of which use AA corporate bond yields. But if a “more exacting” discount rate were used to measure future pension liabilities, the liabilities would have increased 22% to €280 billion, according to the report. Meanwhile plan assets for the 430 companies declined by 15%, or a total of €149 billion.
“We're skeptical about the use of higher discount rates (than appropriate) for pension accounting purposes,” Pierre-Yves Gauthier, director at AlphaValue, said in a telephone interview.
For example, some U.K. companies calculated their pension liabilities based on a 6.2% rate when a more appropriate rate would have been about 5.5%, according to the report. (A higher discount rate would lower future liabilities.) Lloyds Banking Group could have underestimated its obligations by €14.2 billion and Royal Bank of Scotland by €13.3 billion, according to the report. Lloyds reported pension liabilities of €18.4 billion and RBS reported €32.6 billion at the year-end 2008.
“There are huge differences between companies and countries in the use of discount rates to calculate pension obligations,” Mr. Gauthier said. “Particularly in difficult market conditions, it's important that there is more consistency in measuring those pension risks.”