Pension deficit treatment varies among markets

The UK equity market is failing to treat FRS17 pension deficits as company
debt, depite the fact that private equity and debt markets do so, research by
Punter Southall has found.

The consulting actuary found that the pension deficits reported in company
accounts had limited impact on stock valuations, with equity markets reacting
indifferently to deficit figures.

Since the introduction of FRS17 at the beginning of the year, the combined
pension deficit of the FTSE100 has been estimated at £37bn, prompting corporates
with large deficits to scramble around in order to pay down their obligations.

Some of these companies include BT, which is believed to have overhauled its
asset allocation; BAE Systems, which has undertaken painstaking consultation
with employees eligible for pensions; and Royal & Sun Alliance, which has
changed the method for calculating its obligation.

But despite this urgency, equity markets have largely chosen to ignore the
impacts of the deficits according to Punter Southall.

The actuaries said the decision to turn a blind eye was significant, as it
suggested companies might use large deficits as a shield against bids from
private equity groups.

Over two-thirds of the private equity investors interviewed by Punter
Southall said that they had bailed out of acquisitions because of pension
deficits, but company executives would rather keep a deficit high than forgo a
dividend, as markets would prefer a dividend to a reduced pensions gap.

‘The fact that UK equity markets may be failing to price pensions as a debt
of a company is a very important consideration for any investor in equity
assets,’ said Paul Geeson, principal at Punter Southall Transaction Services.

‘If FRS17 deficits are not fully recognised in UK equity market valuations of
a company, then arguably there is a possibility that the shares of companies
with a defined benefit pension scheme may be overvalued.’

But Jerome Melcer, actuarial director at BDO Stoy Hayward, said investors and
analysts would start to look at FRS17 disclosures more closely over the next
year, as awareness grew.

‘In parts of the market, light bulbs will be going off as the effect of
pension deficits disclosed under FRS17 are priced into shares more seriously,’
Melcer said.

But he warned that more effective pricing of deficits into stock quotes would
not necessarily see a softening in prices.

‘There are so many fuzzy factors that go into pricing a stock that it is
difficult to peal away one thing that has affected a stock price,’ he said.


IFRS negatively impacts on revenue growth for EMI Music and pre-tax profits
for home shopping group

Kevin Hart, the finance director of Edinburgh-based oil group
Cairn Energy, sold off 100,000 of his 200,593 shares in the
company at 1,750p per share to take home £1.7m. Three other directors also
cashed in their holdings, including chief executive and founder Bill Gammell who
cashed in over a quarter of his stake in the company to pocket £5.25m and Cairn
general manager Malcolm Thoms who received £2.6m. The group’s share price fell
by 119p to 1,716p on the news. Since striking oil in Rajasthan, India, Cairn has
grown from a small cap business to a FTSE100 company.

The Body Shop has booked a £1m charge into its 2004 accounts as
the group adjusts to the requirements of IAS39, the standard on hedging. ‘The
group did not meet the criteria under IAS39 to apply hedge accounting until
January 2005. As a result, a charge of £1m is included in thesix month period to
28 August 2004,’ a statement from the company said. The group isexposed to
currency fluctuationsin the US, Europe, Singapore, Canada and Hong Kong and
manages the risk by hedging this transaction exposure through forward exchange
contracts covering nine months.

EMI Music, promoter of Coldplay and the Gorillaz among
others, will see revenue growth reduced from 6.5% to 4.5% under IFRS. In a
trading statement ahead of its interim results in November, parent EMI Group
said it had to reclassify revenue from jointly controlled operations under IFRS.
At the same time, group net debt for EMI Group is expected to be approximately
£1.06bn at the interim stage – around £60m higher than the previous year’s
interim level, mainly due to a higher working capital outflow.

Direct home shopping group N Brown said that its 2004
interim pre-tax profits were reduced by £4.6m under IFRS. The group, which
reported pre-tax profitfrom continuing operations up 45.1% to £23.5m for the
2005 half year, said profits over the same period in 2004 had been reduced
because of a change in accounting for marketing costs.

Stacey Cartwright, CFO of Burberry, who was in the running
for the top job at the fashion retailer, was last week pipped to the post by
Angela Ahrendts. A former executive at Liz Clairborne, Ahrendts also spent seven
years as president of Donna Karan International. She will take over from former
Burberry CEO Rose Marie Bravo on 1 July 2006 on a pay package valued at about
£15.6m over three years. For the year ended 31 March 2005, pre-tax profit at
Burberry increased from £140.3m to £164.4m on turnover up from £675.8m in 2004
to £715.5m.

Mouchel Parkman, the support services group, has completed the
calculation of its two defined benefit pension schemes under the new accounting
standard for pension deficits, FRS17. Releasing its final results for the year
ended July 2005, which showed a 119% increase in pre-tax profits from £10.1m to
£22.1m, the group said its actuaries had valued its deficit at £35.5m, net of
deferred tax and a profit and loss account charge for the year ended 31 July
2005 of £7.7m.

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