12 years ago, AlphaValue was born in the midst of the Great Financial Crisis and lasting worries about pension risks as the assets supposed to cover pension obligations went up in smoke. To add pain to injury, rates had already been driven down (see chart) resulting in an increase to the actuarial value of pension obligations. And FCF to pay for the widening deficit was not exactly abundant post 2008-2009.
Long slippage in long rates
2020 Covid is unlikely to have helped on the discount rate front as rates dropped further except at the end of the year. The good news is that Central Banks tinkering with rates and asset purchases have turbocharged assets across the board. The end result is that the deficit pile as computed for the AlphaValue coverage (465 stocks, €11 Trillion market cap) has barely changed from €380bn to €393bn. Not much when set against the mass of obligations (about €2 Trillion which is incidentally not far from the net debt at €2.2 Trillion of the same universe). It looks as if pension risks still matter but less so.
As usual 13 stocks explain more than 50% of the deficit. The names have essentially been the same since … 2000. For investing eyes looking at new business models, pension risks are irrelevant. The one oddity remains VW whose dash into EVs means that it has gained new economy clothes but remains stuck with a c. €60bn pension hole.
Another reading of the same pension coin is to wonder about the €2Tn pension obligations. Discount rates have never reached the negative levels seen on Euro sovereigns, so it is not clear whether Euro-based pension risks will benefit that much from rising long rates (but still at 0.15%).
The US-based pension risks of the European issuers are likely to be better contained as higher $-based discount rates are embarking corporate spreads which may be widening. Hard to predict and in most instances in favour of the sponsor.
The message, if any, is really that if pension risks have remained subdued with discount rates falling from 5% to zero, there is little chance of them ever returning.
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