APRA warns on super liabilities

THE financial regulator has stepped up scrutiny of defined-benefit superannuation plans operated by Australia's biggest companies after deeper investment losses across some funds caused by the past year's market turmoil.

By InvestSMART · 24 Apr 2012

By InvestSMART ·
24 Apr 2012

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The top 20 companies

are collectively sitting on a

$7 billion black hole in unfunded pension liabilities, hurt by falling global bond prices and choppy equity markets.

These stresses have prompted the Australian Prudential Regulation Authority to increase monitoring of the older-style superannuation plans operated by a string of companies including BHP Billiton, Telstra and Woolworths.

APRA said in its latest half-yearly regulatory update that while several funds had been able to improve their position since the start of the financial crisis, some were still in "unsatisfactory financial positions",

"These entities receive close APRA attention," it said, without naming them.

An analysis of the full-year accounts of the top 20 companies reveals defined-benefit superannuation schemes have sunk into a $7.03 billion loss over the past year, bigger than the $5.36 billion loss a year earlier.

However, the results have been skewed by Rio Tinto, which took on more than $US13 billion of mostly Canadian-based defined-benefit obligations after buying Alcan five years ago.

Rio Tinto has pumped billions of dollars into the plan over recent years, including $US610 million last year.

Despite this, the deficit on Rio's plan last year blew out to $US4.66 billion, up from $US3.24 billion a year earlier.

Other large defined-benefit funds sitting on losses include Westpac's with a deficit of $676 million and AMP, which has $370 million in losses.

Most funds have about half their assets tied up in equities, with the rest in bonds, cash and property.

Defined-benefit schemes guarantee a fixed

retirement payout regardless of how their investments perform.

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Frequently Asked Questions about this Article…

What did APRA warn about defined-benefit superannuation liabilities?

APRA warned it has stepped up scrutiny of defined-benefit superannuation plans after deeper investment losses over the past year. In its half-yearly regulatory update APRA said some older-style funds remain in "unsatisfactory financial positions" and are receiving close attention.

How large are the unfunded pension liabilities among Australia’s biggest companies?

An analysis of full-year accounts for the top 20 companies shows defined-benefit schemes sank into about a $7.03 billion loss over the past year (up from a $5.36 billion loss a year earlier), leaving roughly a $7 billion unfunded shortfall overall.

Which major companies’ defined-benefit super plans were highlighted in the article?

The article notes APRA increased monitoring of older-style plans run by a string of companies including BHP Billiton, Telstra and Woolworths. It also cites large deficits at Rio Tinto, Westpac and AMP in the analysis of top-company accounts.

Why have these defined-benefit super funds fallen into deficits?

The deficits were driven by last year’s market turmoil — falling global bond prices and choppy equity markets. Most funds had about half their assets in equities, with the rest in bonds, cash and property, which exposed them to recent market weakness.

What happened to Rio Tinto’s defined-benefit pension deficit?

Rio Tinto took on more than US$13 billion of mostly Canadian defined-benefit obligations after buying Alcan five years ago. Despite pumping billions into the plan, including US$610 million last year, the deficit widened to US$4.66 billion from US$3.24 billion the year before.

How large are Westpac and AMP’s defined-benefit super deficits?

According to the article’s analysis, Westpac’s defined-benefit fund had a deficit of about $676 million, while AMP’s fund showed roughly $370 million in losses.

What does a defined-benefit superannuation scheme guarantee to members?

A defined-benefit scheme guarantees a fixed retirement payout to members regardless of how the plan’s investments perform, which is why funding shortfalls can be a regulatory concern.

What are the key takeaways for everyday investors from APRA’s update on super liabilities?

Key takeaways: APRA is increasing monitoring of older-style defined-benefit plans after investment losses; the top 20 companies’ defined-benefit schemes show a roughly $7.03 billion loss over the past year; some funds have improved but others remain in unsatisfactory financial positions; and market movements in bonds and equities have been a major factor in the stresses reported.