German listed companies comfortably top league of worst pension deficit ratios

Germany’s companies may be the backbone of Europe’s economic performance, but they also worryingly shoulder the highest pension deficit ratios on the Continent, according to analysis by Morgan Stanley.

German companies take half of the highest 10 positions of European and British companies as ranked by their net pension liabilities as a proportion of their market capitalisation.

The table, compiled by analysts at Morgan Stanley’s European equity strategy team, shows 60 of the companies had net pension liabilities of over 15% of their market capitalisation.

German companies appear 13 times in the table – the most of any European nation.

Ranking highly in this league, created by analysts at Morgan Stanley, is not desirable, at least in falling equities markets. Overall since September 2009, the basket of 60 stocks has underperformed MSCI Europe by 27%.

The relative performance of the basket of ‘high pension deficit ratio shares’ has been fairly well correlated to European bond yields since 2006.

Investors seem to have recognised this – the premia in terms of forward 12-month PE ratios for these stocks, compared to the MSCI Europe average, and to that index’s median stock, are near their all-time lows, lagging at discounts of about 20% and about 30% respectively.

A high ranking may become even less desirable from January, when new accounting standards take effect prohibiting companies from keeping losses related to their pension schemes off their balance sheets.

“Companies with a net pension deficit will report net interest expense, and those with a net pension surplus will report net interest income,” Morgan Stanley’s analysts explain. “This will improve balance sheet transparency [but] it may also substantially increase balance sheet volatility.”

In the Morgan Stanley table, German firms take neither gold nor silver – those go to France’s Alcatel Lucent (with a net pension liability 139% the size of its $2.7bn market cap) and the Netherlands’ Delta Lloyd (120.9%).

But materials company Salzgitter takes bronze, with a $2.45bn net pension liability overshadowing its $2.28bn market cap. Closely behind are the debt:market value ratios for Thyssen Krupp (81.7%) and TUI (74%). Rounding out the German companies in the top 10 are Lufthansa (48.1%) and Rheinmetall (46.3%).

On average these German companies have net pension liabilities 72% as large as their market values.

Germany contributes the most companies (13) to the list, though France (12 companies), the United Kingdom (12) and Italy (9) are not far behind.

German companies represented have an average deficit to capitalisation ratio of 42%.

Interestingly, companies in the most troubled states are not so often on the list. Greece has just one (OTE Hellenic Telecom, with a ratio of 30.1%), as does Ireland (Smurfit Kappa Group, 46.9%) and Portugal (EDP Energias de Portugal (18.4%). Spain contributes two – the bailed-out Bankia (28.9%) and Banco Santander (27.3%).

But no ratio for companies on the 60-member list for Continental European firms can compare with the top-ranked UK concern, Thomas Cook Group, whose net pension deficit is equal to 218% of its market capitalisation.

Pension pots of Eurozone companies are generally poorly positioned to benefit if equities rally, as pension funds’ and insurers’ exposure to shares is at its second lowest point since at least 1999. This follows a global trend, as pensions cut their equities exposure by about 20% since 1999, while increasing their bond exposure from around 30% to nearer 40%.


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