Even when accounting for higher discount rates, the average coverage ratio (assets divided by liabilities) of the companies listed on three exchanges we examined showed significance erosion in 2008. The ratio declined 7.8% on average from 65% in 2007 to 57.2% for the CAC-40. This compares to a 4.70% drop for the DAX-30 sample universe which stood at 71.5% on average in 2008. The biggest decline was experienced by the FTSE 100 sample universe which saw its coverage ratio erode from 96% to 86%. The drop for the FTSE universe reflects their higher allocation to equities mitigated somewhat by the higher discount rates they have used to reduce their pension liabilities. For the FTSE 100 universe we only included companies with their financial year ending in December in order to better align data with CAC and DAX companies, the overwhelming majority of which end their calendar year in December. Nineteen companies were selected for the FTSE sample universe.

There were a number of FTSE 100 companies which experienced an improvement in their coverage ratio. Rolls Royce saw its coverage ratio improve thanks in part to an auspicious switch to an LDI strategy (see related article) and a higher discount rate. With Cable & Wireless (which falls outside our coverage ratio universe since its financial year ends in March), reduced its equity allocation from 44% in 2007 to 32% in 2008. In September 2008, the pension trustees of the main UK defined benefit scheme agreed to a buy-in with Prudential Insurance, involving the purchase of a bulk annuity policy which effectively matches the scheme’s liabilities to 5,000 Cable & Wireless UK pensioners. As of 31 March 2009, the company’s pension fund was 50% invested in bulk annuities, 31% in equities and 19% in property, swaps and cash. One of the worst performers is BP which maintained its equity allocation at 77%, only 1% lower than in 2007.

There were also positive exceptions in the CAC-40 universe. A number of companies such as Capgemini and Danone retained fairly stable coverage ratios. France Télécom saw its coverage ratio improve from 27% in 2007 to 32% in 2008. Suez Environment also reported an improvement from 52% to 55% as did Vallourec from 38% to 40%. In the German sample universe, BMW, MAN and Deutsche Telecom posted improvements in their coverage ratio, while Daimler, which has the third highest equity allocation in the group, saw the biggest erosion in its coverage ratio year-over-year from 87.8% to 67.2%. Generally, companies listed on all three indexes reported a reduction in their equity holdings. Companies listed on Germany’s DAX have on average the lowest equity allocations of the three, falling from 40% to 30%. For the CAC-40, equity allocations dropped from 42.9% to 33.4%. Air France-KLM maintained the highest coverage ratio within our CAC-40 sample universe. Yet it experienced a steep drop from 121% to 99%. Renault reported a decline in its coverage ratio from 25% to 23%, the worst performer in the CAC-40 group. In terms of equity allocations, Saint-Gobin (46%), Savonti-Aventis (46%) and Capgemini (44%) are at the high end. Vivendi (16.3%), Essilor International (19%) and Alcatel-Lucent (20%) are at the low end.

VB