Wednesday 6th of April 2005

Moody's Investors Service says - in a new report - that for rated corporates in Australia/New Zealand the impact of unfunded pension obligations on ratings remains negligible, upholding the view outlined in a report on the same topic in 2003. Furthermore, the level of funding by rated issuers for defined benefit pension schemes in both countries remains high, especially when compared to peers in the US and Europe. "Of the Moody's-rated issuers in Australia and New Zealand, the average funding position (fund assets/fund obligations) remains just over 100%," the report says, adding, "And with those issuers that reported under-funding, none of their positions are considered as material against their adjusted debt levels." Moody's analyst, Peter Fullerton reiterates that compared with abroad, "of the corporates rated by Moody's in Australia and New Zealand, the influence of unfunded pension obligations is far less of a ratings issue." "Levels of under-funding are substantially less and no corporate issuer has reported deficits Moody's considers to be material (i.e. above 5% of adjusted debt)," he adds. Of the 24 issuers reporting defined benefit pension schemes, 9 (38%) announced pension surpluses and the remaining 15 (62%) deficits. By comparison, in Moody's June 2003 report on Australian/New Zealand pension obligations, 14 (54%) reported surpluses and 12 (46%) deficits. On the theme of accounting standards, compared with the US and some parts of Europe, Australian Generally Acceptable Accounting Principles do not allow for various complex provisioning adjustments, Fullerton says. As a result, there are limited adjustments that are needed to be made for Australian issuers to isolate their true funded positions. However, the introduction of international standards means that any deficit or surplus (to the extent that it is recoverable) will be recognized as a separate line item on a company's balance sheet, the report says. The fund's position will be reported as a net item in either liabilities for a deficit or assets for a surplus (net of any deferred tax adjustments). In light of the international standards, Moody's analysis will continue to exclude pension deficits from debt figures, while including the deficit in the adjusted debt figure. "The change in accounting standards should also provide a higher level of disclosure and transparency. This includes disclosure of assumptions used for various items, such as expected salary increases and expected returns per class of assets," the report says.