|
By Nick Lord
If there is one thing that CFOs don't like its unlimited liabilities. And when those liabilities are unfunded and mandatory, the fear really starts to flow. Two companies in the U.K. this week have shown just how serious are the problems surrounding their defined benefit (DB) pension schemes. Reader's Digest U.K. has gone into bankruptcy (called administration in the U.K.) as a result of its unfunded pension obligations. The company has unfunded liabilities of £125 million and despite offering a solution to the U.K.'s pension regulator, it was deemed insufficient and the company was placed into administration. Reader's Digest currently employs 135 people but these liabilities cover a group of 1600 who receive DB pensions.
This inverse ratio of workers to pensioners is a familiar problem for many companies, especially those in sectors where technological advances have caused drastic cuts in their workforce such as telecoms and automotive. One automotive company BMW (U.K.), this week came out with a solution for another problem affecting DB pension plans, namely that people are living longer. The company announced that it had entered into a 'longevity swap' with Deutsche Bank and specialist pension insurer Paternoster. Essentially the swap provides a hedge against BMW's retirees living longer and hence increasing the pension liability. While it doesn't provide any additional funding into the £3 billion scheme, which covers 60,000 members, its does limit some of the liabilities that are contained within.
Commenting on the deal Ed Jervis, CEO of Paternoster said: "U.K. pension schemes are increasingly looking to reduce risk and increase security for their members through the use of insurance solutions."
In the US such schemes have been slow to happen. Back in 2007 before the crisis there were teams at banks such as Bear Stearns and RBS who were looking to try and do such deals. Phil Duff who had run Morgan Stanley's hedge fund Frontline had set up a new investment vehicle called Duff Capital to try and buy discounted pension schemes from companies. But all three organizations became victims of the crisis, before even testing the regulatory waters for such insurance or transfer schemes.
This is not to say that U.S. firms are not highly aware of the risks inherent in large unfunded DB liabilities. This week MetLife released its second annual US Pension Behavior Risk Index, a survey among leading US corporations as to how the measure the risks in their pension schemes. The most telling result was that the two biggest risks this year were said to be liability measurement and liability underfunding. In 2009, liability measurement was the sixth biggest risk while the biggest risk was asset allocation.
"A hard lesson learned over the past 12 to 18 months is that managing a DB pension plan in a volatile market is a difficult challenge for even the most sophisticated corporate executives," writes William J Mullaney, President, U.S. Business at Metlife, in the foreword to the report. "Today, it's imperative to have a better understanding of the pension plan environment and how it may impact the overall financial performance of their businesses.
This shift of focus from pension asset risk to pension liability risk is understandable in the current volatile environment. To avoid the fate of Readers Digest, CFOs with large pension liabilities will be watching the BMW deal with some interest.
 |
in CFO Conversations by 
Subscribe to this comment's feed
