Pensions - Management is responding to economic realities

Implications: The key implications of Rank Group's actions are threefold. First, it is harder for companies to borrow from employees with off balance sheet pension schemes.  Disclosure requirements have increased (i.e., FASB). Second, pensions have always been a too-often neglected risk dimension in corporate valuation.  With more disclosure, this risk dimension is being recognized, appreciated, and used in pricing value. Last, the reasons for a company to retain influence over its pension fund are diminishing.  Regulation (e.g., Pension Protection Act) is requiring more discipline in the assumptions used to evaluate pension obligations and the funding of pension obligations.

Analysis: Rank Group closed its defined benefit plan in 2000. However its pre 2000 pension liabilities, and related assets, still weigh heavily on the group's management. This is due to two major related forces.

First, new disclosure requirements are giving investors a clear picture of the company's obligations from the pension fund.  Example, the net PBO (projected benefit obligation less assets) is being put on the balance sheet.  No longer can companies hide the closet leverage of borrowing from it's employees. The full impact of unfunded deferred compensation is being revealed in comprehendible terms and format.

Second, with this disclosure, the inherent risk in defined benefit plans is being better understood by investors. With this understanding, the risk imbedded in defined benefit plans, and the sponsors of such plans, is being used to price the sponsors' debt and equity.

The result is simple, particularly for companies that have closed the company's defined benefit plans.  There appears to be diminishing benefit for a company to retain influence over the investment decisions of its pension plans.  It makes sense for a company to sell its pension obligations and assets to institutions that have the expertise to better manage the risk and return needed to fulfill the pension promise.  Companies need to get rid of the risk inherent in such pension plans.  If such a move is properly handled, value can be enhanced for all concerned (e.g., sponsoring company, employees, purchaser of fund assets/liabilities, etc.).