MARKET COMMENT
Check The Small Print

By Stuart Watson (TMFTiger)
October 4, 2001

Great Titchfield Street, London -- A common suggested starting point for looking at a set of accounts is "start at the back". This way you avoid all the glossy preening at the front and get down to the nitty gritty of what is really going on. It's very much like looking at the small print.

The first thing I check is how much debt a business has (the net debt note and not the balance sheet is the place to look for this) and how much of the business's profits are turned into cash. But, I have to admit, I've never spent much time looking at the pension note. However, it looks like we'll have to in future.

At the moment, those companies with defined benefit schemes are getting hit from both sides. The recent falls in the stock market have meant some of them may need to pump additional money into their funds. On top of that the accounting regulations are being tightened over the next two years meaning that companies may have to make additional provisions for pension costs. This could have an impact on both dividends and credit ratings. The latter would increase their interest costs. The former obviously hits your returns more directly.

The issue of pension shortfalls raised its head a couple of months ago and it did seem to be somewhat of a false alarm once you looked at the figures in a bit more detail. However, after further falls, it is becoming more of an issue. Take a look at BT for example. Its pension fund is valued at around £30b, which is incidentally the same as its market capitalisation. At the moment it is putting in around £300m to £400m a year, that's around 10% of its operating profits. But it has a shortfall so this amount could easily increase. As a general rule of thumb the older a company and the more labour-intensive its business, the greater the likelihood that it will have a sizeable pension fund.

Thankfully, the new accounting regulations will make this information more digestible. However, it is yet another nail in the coffin for defined benefit schemes and another reminder that the person ultimately responsible for providing for your retirement is the one you see in the mirror each morning.

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