BusinessCorporate FinanceInvestors urged to examine pension figures

Investors urged to examine pension figures

Experts warn investors to look beyond the large pension deficit figures and consider them in the context of other indicators

Analysts have warned investors to look beyond FRS17 disclosures to assess the
true impact of pension deficit figures on company accounts, after an analysis of
pension shortfall in the FTSE100 revealed some companies were billions of pounds

Punter Southall, which monitors the FRS17 pension disclosures of the UK’s
leading companies, said BT had the largest pension obligation in the FTSE100
with a deficit of £5.1bn, followed by BAE Systems with a deficit of £4.2bn and
Lloyds TSB which has a £3.1bn gap. Other companies with large deficits included
Royal Bank of Scotland (£2.8bn), Unilever (£2.7bn) and National Grid Transco

But Sue Harding, European chief accountant at Standard & Poor’s, said the
raw numbers disclosed under FRS17 needed to be scrutinised carefully to reveal
the actual effect on a company’s position.

‘A pension deficit figure only reflects the deficit at a point in time and is
calculated using a host of assumptions. It is impossible to capture the whole
issue,’ Harding said.

She added that credit ratings analysts looked at a number of elements, such
as how a number is calculated and how assets are invested, when looking at
reported pension deficit figures.

Peter Elwin, head of accounting and valuation at Cazenove, said that figures
needed to be compared to other indicators to be meaningful. ‘One of the key
metrics for evaluating a pension deficit is to look at a companies market cap
and compare it with the size of the deficit,’ he said.

The implementation of IAS19 – the standard that will replace FRS17 – could
change the interpretation of pension deficit disclosures further.

‘IAS19 and FRS17 are very close, but fund assets could come in lower because
IAS19 uses the bid price for shares as opposed to the mid-market price,’ he

Meanwhile, research by RBC Capital Markets Open Market Forum found that,
despite the billion-pound pension deficits that have come onto company balance
sheets since the introduction of FRS17, many large companies have made minimal
improvements to their deficits over the last 12 months.

The £11.4bn worth of pension contributions made by companies in the FTSE100
was in line with previous years, but after meeting new pension promises and
paying interest on previous deficits, the forum found that less than £1bn was
available to reduce a combined underlying shortfall of £60bn. Companies are
banking on a bullish equity market to plug the deficit gaps.


AGA lists ingredients for successful pre-tax profits increase, while Shell
hopes to settle employee dispute

Oil giant Shell announced that a settlement has been
reached in a class action and related litigation brought against the company by
employees participating in certain US employee savings plans, which are subject
to the Employee Retirement Income Security Act of 1974 (ERISA). The class action
lawsuit, which is pending in the US, makes certain ERISA-related claims based on
Shell’s recategorisations of its proved oil and gas reserves. An order
preliminarily approving the settlement has been entered. If the court approves
the settlement, Shell will have to pay out $90m (£50.9m).


AGA Foodservice Group said that 2004 pre-tax profit will
increase from £12.7m to £15.5m when it restates its accounts under IFRS. The
of AGA ovens said that the main adjustments were the scrapping of £4m worth of
goodwill amortisation and a pension charge of £1.2m.

An increase in Sarbanes-Oxley work in Europe has helped the Management
Consulting Group
to deliver revenues in line with expectations when it
releases interims for the six months to 30 June 2005. The group added that it
had won some ‘larger than normal opportunities’, which had required substantial
selling costs but would ‘have a longer tail of revenue than
is typical’.

Attributable earnings at chemicals company Delta are
expected to be up for the trading period ended 1 July 2005, as the group has
successfully reduced its interest expense, achieved a lower effective tax rate
and favourably resolved ‘certain legacy matters’.

A profit warning has been issued by Mowlem as it prepares to
undergo a review of its profit recognition and contract valuation ­ a move it
classes as a ‘major undertaking’. The construction group said that a preliminary
review of this assessment had caused it to revise profits down £20m on market
expectations. Finance director Paul Mainwaring, appointed to the role in May, is
leading attempts to find a realistic and consistent way to treat contract
revenue, according to a spokesman.

An anticipated 30%-35% increase in headline earnings for the half year at
South African-based Anglo-American Platinum has been partly
attributed to a R172m (£14.6m) reduction in a deferred tax liability. The mining
company said that the reduction tracked the change in the South African
corporate tax rate from 30% to 29%. The company also benefited from an after tax
foreign exchange gain of R306m and an after tax increase in the value of metal
inventories of R234m, which arose mainly from a gain in the quantity of pipeline
stocks as indicated by a full stock count.

Toiletry and aerosol producer Swallowfield said there would be a ‘misalignment’
between its short-term costs and sales as it had maintained its gearing levels
in anticipation of stronger sales. The group added, however, that this was a
temporary difficulty and would not affect its outlook for the 2005/06 financial

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