Company News, 2003-11-28, 01:00 AM
ThyssenKrupp welcomes findings of report into treatment of pension obligations in the rating process
Call for standard international treatment of pension provisions and pension funds
ThyssenKrupp AG welcomes the findings of the research report produced by Prof. Dr. Wolfgang Gerke (Friedrich-Alexander University of Erlangen-Nuremburg) and Prof. Dr. Bernhard Pellens (Ruhr-University Bochum). In it, they criticize the fact that the different ways of funding pension obligations are not always taken into account appropriately by the major rating agencies. This, they say, leads to distortions in international comparisons between companies with external pension funds and those with internal pension provisions.
For this reason, the authors propose that all rating agencies should use a so-called on-balance sheet approach for their comparisons, whereby the assets and capital of the pension fund are brought onto the balance sheet of the company analyzed and the associated risks are recognized in full. However, this approach is not customary in the Anglo-Saxon countries, where an off-balance sheet method is used. A workaround therefore has to be used for comparative analysis. The balance sheets of companies with internally funded pension plans are adjusted to look the way they probably would if the pension plans were externally funded. For this it is assumed that the companies transfer their pension provisions to an external pension fund. To allow comparison of their capital structure and capital investment risks, however, assumptions have to be made about the way the capital is raised and the investment strategy of the fictitious fund. These assumptions are more or less arbitrary, which is why the off-balance sheet approach is regarded by the authors only as a second-best solution. Where the off-balance sheet method is used, the authors recommend that a company with the comparatively lower-risk variant of internal pension provisions be given a calculation advantage in the rating process over a company with the higher-risk external pension funds. For this, part of the provisions ought to be added to equity in the rating process.
Dr. A. Stefan Kirsten, ThyssenKrupp AG Chief Financial Officer: "This confirms our view that common standards must be applied to all companies in international comparisons. We can now point to the differences with academic backing. With the current method, ThyssenKrupp at any rate is being disadvantaged by one rating agency in the comparative assessment of pension plans."
The research report "Pension provisions, pension funds and the rating of companies - a critical analysis" was commissioned by ThyssenKrupp AG and two other DAX companies after the method change at the rating agency Standard & Poor`s in February 2003 and has now been presented by the professors. ThyssenKrupp emphasizes the complete independence of the experts in their academic analysis.
In the opinion of ThyssenKrupp, the findings confirm the view that internal pension provisions should not be simply added in full to debt when making a comparison with a company with external funding via pension funds. The advantage currently enjoyed by Anglo-Saxon companies in particular would be eliminated if the on-balance sheet approach preferred by the experts were used.
Applying an off-balance sheet approach to ThyssenKrupp and assuming a risk/return profile of a typical Anglo-Saxon pension fund with a 10% return on investment, the experts believe that around 25% of the pension provisions should be added to equity. Dr. A. Stefan Kirsten: "In the case of ThyssenKrupp that`s around 1.8 billion euros which should be added to equity in the rating process."
The research report has been made available to all the major rating agencies.
For more information, go to www.prof.-gerke.de and www.iur.rub.de/forschung/pensions.html.
Dr. Jürgen Claassen
Corporate Communication and Central Bureau
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