David McNeiceMore corporates could be forced to plough money into their defined benefit pension plans after a survey of Australian listed companies revealed a modest funding shortfall of less than $2 billion six months ago is now an estimated $25 billion black hole due to falling interest rates and asset values.

A Watson Wyatt survey of ASX-listed companies found that the funding gap of these companies increased from $1.7 billion at June 30, 2008, when companies had more than $58.4 billion in DB liabilities backed by over $56.6 billion in assets, to an estimated $25 billion at the end of last year.

Recently, Qantas announced it would tip $66 million into its $5 billion DB superannuation plan, while the $5.7 billion Local Government Superannuation Scheme has been forced to increase contribution rates for its DB scheme from July 1, 2009 until June 30, 2010.

(Watson Wyatt did not specify individual fund shortfalls in its survey results.)

David McNeice, principal at Watson Wyatt, said many companies were being forced to make extra contributions at a time when they should ideally be hoarding cash.

“The financial strength of funds has weakened obviously, quite substantially over the last six months, and it is requiring top-up contributions to be made,” he said.

“It’s exactly at this time when corporates may need to preserve their capital and preserve their cash, simply to get through the crisis, and yet they need to be topping up their superannuation plans, so it’s a very difficult balancing act.”

However McNeice said it was important to remember that these numbers are based on AASB119 accounting disclosures, and there are other important measures of a DB super fund’s health, such as vested benefits – the amount an employee receives when they voluntarily leave their employer.

“There are different measures of liability and they’ve got different purposes,” McNeice said.

“Both are important in their own right but you can’t simply say that because there’s a $25 billion shortfall in accounting terms that means there’s a $25 billion shortfall in coverage of the vested benefits. Normally it won’t be substantially different, but it’s not a one-for-one relationship.”

According to Watson Wyatt, over the six months from July 1, 2008, yield on ten-year Commonwealth Government bonds, which are used to determine the actuarial value of future cash flows, fell from 6.5 per cent per annum to 4 per cent.

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