Profits of public companies may suffer hit over pensions

THE profits of Irish public companies with defined benefit pension schemes could take a big hit from the €2bn plus fall in the value of their pension assets this year, according to stockbrokers Merrion Capital.

Merrion has identified the three companies Viridian, Waterford Wedgwood and Glanbia as having “an unsustainably low level of pension fund contributions”. “Companies where we estimate a ‘point in time’ pension scheme deficit of greater than 10% of the company’s market value include Waterford Wedgwood (-31%), Glanbia (-11%), Ardagh (-92%), and Qualceram (-35%).

However, this in itself does not necessarily signal any impending problem, the brokers said yesterday.

Merrion argues that at a minimum the severity of the downturn in equity markets will speed up the case for a rise in pension costs for many companies.

“The exact nature and timing of any such rise in pension costs for companies is defined at the time of an actuarial review, which is normally carried out every three years,” Merrion said.

Merrion’s estimates indicate food company Glanbia has a ‘point in time’ deficit of more 16.7%, 52m. Glanbia’s pension costs of €5.4m represents just 2.2% of employment costs, which Merrion says is very low.

Merrion estimates an increase in pension costs to 5% of employment costs would knock profits at Glanbia back by about 8%.

“However, management has indicated that while pension costs will go up, it does not expect them to rise to 5%,” Merrion said in its review.

The stockbrokerMerrion estimates that Waterford Wedgwood (WW) has a combined ‘point in time’ deficit of close to €113m on its Wedgwood and Waterford Crystal defined benefit pension schemes having taken current falls in equity markets into account. “This represents a 30% deficit on the schemes and equates to 32% of the company’s own market value,” said Merrion.

Merrion estimates if WW’s pension costs were to rise to 5% of total employment costs in aggregate, which they say appears quite plausible, the increase in costs would equate to about 13% of 2003 pre-tax profits.

Waterford Crystal management has, in discussions with Merrion, ruled out the requirement for a special lump sum contribution to the scheme. The next actuarial review for Wedgwood’s defined benefit pension scheme is due at end 2002 and end 2003 for Waterford Crystal’s,” Merrion said.

Merrion said the average pension cost for Irish plcs was running at a lowly 3.9% of total employment costs and could be expected to rise to perhaps as much as 6-7% as liabilities rise and as the flexibility to reduce contributions or amortise surpluses at the operating cost level is eliminated, due to declining asset values.

“At a minimum, the severity of the downturn in equity markets will speed up the case for a rise in pension costs for many firmcompanies. In saying this, however, we recognise that the factors driving the level of contributions into defined benefit pension schemes differ from company to company.