Disarray of pensions and increasing indebtedness levels after a financial crisis

In a major financial crisis, a question always arises: what about pensions (for Defined Contribution Scheme beneficiaries)? They can only cry all the tears of their bodies. That's where the problem lies.

Years of trying to avoid pensions in the form of a "Defined Benefit" to limit risks of corporations (unlimited risk, in case of State incapacity to pay for pensions). But it appeared that the beneficiaries (i.e. employees) on whose back the risk rests, if he had the misfortune to get out of the plan during a financial crisis (i.e. if he/she retires), was well diminished. Going to pension now, after the beginning of the financial crisis is horrible. With a DC-type plan, the timing of exit is crucial for the beneficiary. So, we can only wish courage to those who must go out now and in the coming months, they will lose a lot of money. Isn't that why we invented what is dear to the Dutch, Canadians, English, etc. the famous "CDC" or “Collective Defined Contribution” schemes  which by their nature, their diversity and the spread of payments in addition to their "adaptive" side, make them solid weapons in the face crises. The CDC are more resilient and resistant tools. However, not all countries have adopted it and not every company can claim having the minimum size required for this type of plan.


It is therefore clear that in terms of supplementary pension, action was needed and is still needed to be taken to protect the company (to fully get rid of the "DB schemes") and to protect the employee ("CDC"). It is this kind of crisis that is moving things, unfortunately (too) slowly.

On the other hand, we must be concerned about all companies that have opted for "DB" plans by legal obligation or contractual choice. These are at (high) risk. These companies are going to have latent deficits from their abyssal plans. When we know that this economic debt (related to pension deficits), debt used by rating agencies, will be burdened with latent deficits on pension obligations, there are questions.

"The debt is increasing without doing anything, simply by the effect of stock-exchange valuations. There is rating downgrading in the air."


The current stock market crash would have widened the deficit in pension plans. Morgan Stanley was talking about the $619 billion deficit on the New York publicly listed companies as of March 16th. Even more (I guess) at the time of reading this article. They would be covered at 74%, the lowest level in 11 years. Imagine the British, German and European companies whose debt has just made a dramatic leap mechanically. The debt is increasing without doing anything, simply by the effect of stock-exchange valuations. There is rating downgrading in the air. In Europe, Alpha Value was talking about EUR 700 billion of deficit after the crisis.... There's something to be afraid of. There are giants with feet of clay that will wobble. All this even before the discount rates (used for exit in capital) are logically reduced, which will mechanically lead to higher liabilities. The lower the discount rate used, the higher the principal to be paid by the company for DB (or assimilated) schemes. Did you say "difficult situation"? Specifically, I will say “extremely delicate”. This is what I call "virtual additional" debt because it does not appear in debt under the IFRS standards definition, but it exists and must be added to the other external debt. The spiral is hellish because society faces difficulties, borrows more, loses "notches" and is also penalized by the pension effect in return, like a boomerang that digs the debt even more and negatively impacts the credit rating. The lower rating leads to the risk of switching to "sub-investment grade" and increases the cost of debt. It's going to hurt a lot I'm afraid...

As the well-known Latin saying rightly puts it: "Bis repetita non placent".


François Masquelier, CEO, SimplyTREASURY