Defined benefit super schemes $7b in the red

THE top financial regulator has stepped up scrutiny of defined benefit superannuation plans operated by the biggest companies as market turmoil over the past year has seen investment losses across some funds deepen.

By InvestSMART · 24 Apr 2012

By InvestSMART ·
24 Apr 2012

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Australia's top 20 companies are collectively sitting on a $7 billion black hole in unfunded pension liabilities, hurt by falling bond prices and choppy equities markets.

This has prompted the Australian Prudential Regulation Authority to increase monitoring of the older style superannuation plans operated by a raft of companies including BHP Billiton, Telstra and Woolworths.

While some funds have improved their position since the start of the financial crisis, there are still those in "unsatisfactory financial positions", APRA warned in its latest half-yearly regulatory update.

"These entities receive close APRA attention," the regulator said, although it did not name the funds.

Analysis of the full-year accounts of the top 20 companies reveals defined benefit superannuation schemes have sunk to a $7.03 billion loss over the past year, after a $5.36 billion loss a year earlier.

However, the results have been skewed by Rio Tinto, which took on more than $US13 billion ($12.6 billion) of mostly Canadian-based defined benefit obligations after buying Alcan five years ago.

Rio Tinto has pumped billions of dollars into the plan, including $US610 million last year. But last year the deficit on Rio Tinto's plan still 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's, with $370 million in losses.

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

Defined benefit schemes guarantee a fixed retirement payout regardless of investment performance. Payouts are usually calculated on a combination of years of employment and salary at retirement. Australian companies largely closed their defined benefit schemes last decade, which has helped them avoid the ballooning liabilities of their global rivals.

Latest figures show only 2 per cent of members of large APRA-regulated funds were in pure defined benefit funds while 59 per cent were in accumulated funds - where the fund member takes the risk.

In Australia there is more than $53 billion in assets tied up in "pure" defined funds. There is nearly $329 billion in so-called hybrid funds that have elements of defined and accumulated funds.

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Frequently Asked Questions about this Article…

What is a defined benefit superannuation scheme and how does a defined benefit payout work?

A defined benefit superannuation scheme guarantees a fixed retirement payout regardless of investment performance. Payouts are usually calculated from a combination of years of employment and salary at retirement, with the employer responsible for meeting the promised benefit.

Why has APRA stepped up monitoring of defined benefit super plans?

The Australian Prudential Regulation Authority (APRA) has increased monitoring after market turmoil over the past year caused investment losses—falling bond prices and choppy equity markets—that left some older-style defined benefit plans in "unsatisfactory financial positions." APRA singled out increased attention on plans run by large companies such as BHP Billiton, Telstra and Woolworths.

How large is the unfunded pension liability in defined benefit schemes among Australia’s top companies?

Analysis of full-year accounts for the top 20 companies shows defined benefit superannuation schemes have sunk to a $7.03 billion loss over the past year, up from a $5.36 billion loss a year earlier.

Why did Rio Tinto’s defined benefit obligations grow so large?

Rio Tinto took on more than US$13 billion (about $12.6 billion) of mostly Canadian defined benefit obligations when it bought Alcan. Although Rio Tinto has injected billions into the plan (including US$610 million last year), the deficit still widened to US$4.66 billion from US$3.24 billion a year earlier.

Which other big Australian companies have meaningful defined benefit fund deficits?

The article notes other large defined benefit funds sitting on losses, including Westpac with a deficit of $676 million and AMP with $370 million. APRA is closely watching a range of older-style company plans.

How are assets in defined benefit super funds usually allocated?

Most defined benefit funds have about half of their assets invested in equities, with the remainder in bonds, cash and property—an allocation that exposes schemes to both equity and bond market movements.

How common are pure defined benefit funds in Australia today, and how much is invested in them?

Only 2% of members of large APRA-regulated funds are in pure defined benefit funds, while 59% are in accumulation funds where members take the investment risk. There is more than $53 billion in assets tied up in pure defined benefit funds in Australia, and nearly $329 billion in hybrid funds that combine defined and accumulation elements.

What does it mean that companies largely closed defined benefit schemes last decade?

When companies closed defined benefit schemes, they stopped offering guaranteed payouts to new members. That shift has helped Australian companies avoid the ballooning pension liabilities seen by some global rivals; new members typically join accumulation-style funds, where the individual member bears investment risk instead of the employer guaranteeing a fixed payout.