Beware UK pension-plan reviews, Moody’s warns investors

Impending pension scheme revaluations may force companies to raid their own coffers to top up funds, says ratings agency

Cash flows at Europe, the Middle East and Africa non-financial corporates could be hit over the coming year if those firms are forced to find extra money to plug gaps in their UK-based pension plans, according to a new report from Moody’s.

The report points out that every three years, companies with UK pension plans must review whether or not their return-on-investment (ROI) assumptions – which play a key role in shaping the scale of their pension obligations – remain appropriate, given prevailing economic conditions.

With the next round of triennial revaluations due to fall over the remainder of the year and into 2017, Moody’s advises that, in today’s low-yield climate, it is likely that firms will lower their ROI assumptions.

That will typically mean that they will need to pay larger sums into their pension plans.

Moody’s notes that, while many companies voluntarily provide information about their pension finances that investors would find helpful, half of the 20 firms named in its report have not quantified their funding deficits.

The ratings agency’s vice president and senior credit officer, Trevor Pijper – who authored the report – explains: “Companies aren’t required to report funding valuation results in their annual accounts.

“This makes it difficult for investors to identify the firms affected by an impending funding valuation update, and the scale of the threat to their cash flows, from publicly available information.”

Indeed, only two firms featured in the report – AstraZeneca and BT Group – have volunteered fully comprehensive information, including their key ROI assumptions.

For an example of how pension-plan valuations can balloon, Moody’s again refers to BT Group, which updated the 30 June 2011 funding valuation for its largest scheme as of 30 June 2014.

On that occasion, it used a more prudent view of the likely future return on the plan’s investment portfolio than it had three years earlier. The cash outflow committed under the recovery plan – excluding contingent payments – swelled from £4.7bn to £9.6bn.

However, it notes, in many cases companies will offset their cash-flow exposure through risk-reduction initiatives.

Such strategies may include insurance contracts that reimburse the benefits payable to current pensioners, and/or liability-driven investment portfolios designed to offset interest-rate and inflation-rate risks.

Registered Moody’s subscribers can access the full report here.

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