4 Jul 2013
Flash: Pension funding risks dwindle with higher yields – Goldman Sachs
FXstreet.com (New York) - According to the Economics Research Team at Goldman Sachs, “Corporate pension funding has been a key risk for equity investors in recent years due to pension expenses, the risk of cash contributions and leverage that could result in credit downgrades.”
Going forward rising bond yields coupled with decent equity returns should reduce those risks. We estimate a 20% equity return and a 100 bp increase in discount rates (from levels at the end of last year) would result in the return to full solvency for the STOXX Europe 600 in aggregate.
Companies with large pension obligations to outperform
“Companies with the largest pension obligations or deficits consistently underperformed with declining bond yields. In addition they trade at large discounts to the market and their respective sectors. With rising bond yields we expect the underperformance to reverse and valuation discounts to narrow – companies in our GSSTPENS-basket should outperform.” the team adds.
Going forward rising bond yields coupled with decent equity returns should reduce those risks. We estimate a 20% equity return and a 100 bp increase in discount rates (from levels at the end of last year) would result in the return to full solvency for the STOXX Europe 600 in aggregate.
Companies with large pension obligations to outperform
“Companies with the largest pension obligations or deficits consistently underperformed with declining bond yields. In addition they trade at large discounts to the market and their respective sectors. With rising bond yields we expect the underperformance to reverse and valuation discounts to narrow – companies in our GSSTPENS-basket should outperform.” the team adds.