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Seven months before they come into force, new pension accounting rules are already casting a shadow over European companies facing onerous retirement obligations.
However, few – if any – are likely to be as exposed as PostNL, the former mail delivery monopoly in the Netherlands.
By pushing more of the volatility inherent in defined benefit pension schemes onto the balance sheet, the accounting overhaul could constrain PostNL’s ability to pay cash dividends to its shareholders.
The changes – designed to improve clarity and comparability for investors – will hit companies using the International Financial Reporting Standards followed in the European Union and other countries.
From 2013, companies reporting under IFRS will no longer be able to defer recognition of actuarial gains and losses associated with defined benefit schemes, which tend to be relatively generous to their members.
That removal of the deferral option, known as the “corridor method”, will in some cases require losses deferred in the past to land on the balance sheet with a big thump.
The impact will be particularly jarring at the Euronext Amsterdam-listed PostNL, whose defined benefit schemes cover 95,000 people, including retirees.
Last month, it estimated that the rule change would have forced it to take a net loss of €1.08bn had it come into force in March. In turn, this would have wiped out its consolidated shareholders’ equity, which stood at €1.03bn.
Jan Bos, PostNL chief financial officer, says the group will not be able to pay cash dividends if it had negative consolidated equity, although he stresses that the impact could be different by the time the rule is in force.
The company – which has a market capitalisation of €1.1bn – had already been obliged to pay its 2011 final dividend in shares.
“We can’t change the accounting rules,” Mr Bos says, adding that PostNL was hoping to persuade unions to make some concessions on pension benefits that would ease the balance sheet impact.
Although it is at the extreme end of the scale, PostNL is by no means the only business expected to be hit by the ending of the corridor method.
In a recent report, JPMorgan Cazenove identified 28 large European companies where it believed the reduction in shareholders’ equity would be equivalent to at least 5 per cent of market capitalisation.
Those that it sees as being affected include: Lufthansa, the German airline; Fiat, the Italian carmaker; International Airlines Group, the owner of British Airways and Iberia; and Swisscom, the Swiss telecommunications group.
However, Dennis Jullens, an analyst at UBS, believes the elimination of the corridor method is not the most significant pension accounting reform due to come into force in 2013.
Instead, he highlights a related crackdown on the way some companies increase their profits by predicting strong returns on investments in their pension schemes.
Companies have hitherto been able to benefit from a mismatch between the interest cost applied to their defined benefit pension liabilities and the return they assume they will receive on plan assets.
The reform will oblige them to use the same rate for both calculations – with material consequences in many cases.
Babcock International, the British engineering support services group, last month estimated that the revision of the IAS 19 pension accounting rules would have cut its profit by £39m on a pre-tax basis in the year to March 31, 2012, had it been in force.
This is equivalent to 23 per cent of its statutory pre-tax profit for that period, or 14 per cent of the underlying pre-tax profit.
However, Babcock stressed that the change would not affect cash, adding that it expected the eventual impact to have been reduced by regular cash contributions and other measures.
Investors should expect similar updates in the coming months from other businesses that have not yet quantified the income statement impact of the pension accounting revamp.
“Quite a few companies really haven’t started flagging this in a major way,” says Peter Elwin, an accounting analyst at JP Morgan Cazenove. “It’s a transitional period.”