2002 October 06 Sunday
Underfunded Corporate Pension Funds

The Economist has an article about underfunded corporate pension funds. The problem is particularly acute among German corporations:

Of 47 companies with outstanding bonds examined by Dresdner, only six had pension funds with assets that exceeded liabilities: General Electric of the US; Unilever; Philips; Corus; FKI; and Dow Chemical. Worryingly, the rest all had shortfalls. Those with the worst deficits were German companies, but for good reason: German firms are not required to set aside money to cover their pension-fund liabilities but do have to carry the cost on their balance sheets. For well-heeled firms like Aventis, a pharmaceuticals and agribusiness group, this poses little problem even though in 2001 the company’s pension liability was half as much again as its earnings before interest, tax, depreciation and amortisation. But for others, such as E.On, an international energy and engineering group, any increase in its liabilities may well affect its credit rating and so the interest rate it has to pay when issuing new bonds.

The article goes on to point out that as interest rates continue to drop the bond yields in the pension fund portfolios decline and the size of the unfunded liabilities rises. This is a far more serious problem on the European continent than in either the UK or the US. Europe's declining birth rates, slower, economic growth, and higher unemployment rates all make the pension fund liabilities greater. European countries are going to have to raise their retirement ages and make their labor markets more flexible.

Share |      By Randall Parker at 2002 October 06 06:37 PM  Economics Political


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