The effects of the UK’s pensions crisis have not yet reached the apocalyptic levels we were warned of this week. But they are noticeable nonetheless. Permira’s bid for WH Smith was scuppered last month because the pension-fund trustees were demanding a substantial up-front cash injection into the fund to help make up its deficit, and it is also a key issue in Philip Green’s approach to Marks & Spencer. But the pensions issue is already forcing firms into liquidation. Last week, loss-making footwear company FII was forced to scrap plans to sell the company because of fears that a £70m pension liability would follow the firm to potential new owners.
So which companies are most at risk? The first thing to realise is that there are two ways in which companies are at risk from their pension-fund deficits. The first is through lower returns in equity markets. The second is through lower interest rates, which increases the future values of the liabilities they have to pay.
Perhaps not surprisingly, the principal sectors suffering from deficits at the moment are the older, more mature ones, whose pension liabilities were built up during periods of higher inflation. As a percentage of both market capitalisation and net assets, the ten European sectors with the highest deficits, according to DresdnerKleinwortWasserstein (DKW) research, are: utilities (RWE, E.ON, Suez, National Grid); autos (Volkswagen, DaimlerChrysler, BMW); chemicals (BASF, Bayer, Degussa, Akzo Nobel); aerospace (EADS, BAE, Rolls Royce, Thales); engineering (ThyssenKrupp, Volvo, SKF A); support services (Deutsche Post, Compass); electronics (Siemens, ABB); transport (Lufthansa, British Airways); beverages (Diageo, Allied Domecq, Scottish & Newcastle, Interbrew, Heineken, SABMiller), and personal care (Henkel Pref, Beiersdorf). The companies in these ten sectors account for 75% of those deficits.
Individual firms most exposed to the equity market are BT Group (with pension-plan assets equal to 170% of market capitalisation); BAE (158%); Rolls Royce (120%); GKN (85%); Exel (85%); United Utilities (67%); Sainsbury (48%); Cable & Wireless (48%); Whitbread (46%), and Aviva (43%). All have equity weightings greater than 60% of total plan assets.
Those companies most exposed to falling corporate-bond yields (and therefore discount rates), on the other hand, are DaimlerChrysler; Michelin; Rexam; RWE; Lufthansa; BCP R; Hanson; Thales; Degussa, and lastly BAE, which features on all of DrKW’s lists.