LCP global survey reveals growth in pension deficit of the world’s largest companies, despite record company contributions
1 December 2010

The pension plans of the world’s largest multinationals have fallen further into deficit despite record company contributions, according to a new report from LCP, a leading European firm of consulting actuaries.

Although 2010 has been a good year for investment returns, the gains and deficit contributions have been more than offset by the impact of falling corporate bond yields which are used to value pension liabilities for accounting purposes.

The survey reveals significant deficits for a number of companies, with several in the range €5-10 billion. As a proportion of market capitalisation, the companies with the biggest pension deficits were Axa (18%), Boeing (16%) and Daimler (15%).

The findings are included in LCP's European Pensions Briefing 2010, published today, which highlights the key pension issues facing finance directors and other senior management of companies with European operations, as well as outlining a number of solutions and case studies. Other issues covered by the briefing include:

Whilst the UK population has only average life expectancy compared with other industrialised nations, companies typically assume that their UK employees will out-live other nationalities. According to company disclosures, UK-based employees retiring today are expected to live to 87 compared with 84 for both US and German-based retirees. This begs the question: "are companies being overly prudent in the UK, or not considering the full ramifications of demographic change in other countries?"
Companies will no longer be able to take expected future pension plan asset outperformance above corporate bond returns into account when calculating profits, if proposed changes to the accounting standard IAS19 are implemented. LCP predict this would have a markedly different impact between locations, with a significant reduction in profits for those with US based pension plans, a moderate reduction in the UK and a much smaller effect (in some cases an increase) across Europe.
The briefing considers how companies can best identify, mitigate and communicate pension risk. "Value at Risk" and other measures are explored as ways to help companies understand and manage their exposure. LCP estimates that there is a 1 in 10 chance that the aggregate pension deficit could grow by at least a further €100 billion, to over €260 billion, during 2011.
Payments into Defined Contribution pension plans increased by an average of 8% in 2009, reflecting the global trend away from Defined Benefit pension provision.
President Obama's healthcare reforms place new demands on multinationals with US operations. The briefing looks at how companies can prepare most effectively, and highlights the key decisions they must take.

Shaun Southern, UK Partner and Head of LCP's International Practice, said: "Over the past 12 months, global pension plans have been hit hard by the fallout from the credit crisis and subsequent economic challenges. As deficits continue to climb, the corporate risks of defined benefit pension plans have never been greater."

Alex Waite, LCP's International Director, said "Directors could be lulled into a false sense of security from rising stock market values and higher pension contributions. However, if overlooked, investment and demographic risks could undermine business planning, shareholder confidence and employee relations. Further urgent action is still necessary, but this remains achievable if directors take time to engage with the issues they face and seek out appropriate and innovative solutions to their pension exposures."