(January 24, 2013) – Global Investors have been warned to look more deeply into a nation’s pension liabilities when evaluating the solvency of sovereign issuers, as the seemingly healthiest economies could be undone by these obligations.
A study from the Edhec-Risk Institute said while investors were aware of pressures on public and private pension systems in Europe, a closer look into how each nation measured their liabilities uncovered some surprising results.
“Due to the variety of national systems, obtaining a clear view of pension liabilities is not straightforward,” the study said. To demonstrate, the institute used a uniform discount rate to measure each member state in the European Union’s public pension obligations as a percentage of 2010 GDP.
Using a 5% discount rate – which is higher than most European countries are using – it found accrued-to-date discount rates of over 100% for 18 of the 27 European Union member states. The remainder had liabilities of over 200% to GDP.
When using the lower 3% discount rate, 11% of the 27 nations had liabilities over 400% as a percentage of GDP, six that were over 800% and the remaining countries were incalculable.
The study said the most surprising thing for investors would be that countries with “virtuous public finances” – according to guidelines on government debt set out in the 1996 Maastricht Treaty, which originally established the region’s single currency – are much less virtuous if their public pension commitments are taken into account. These include Sweden, Denmark and Luxembourg. Conversely, the beleaguered Eurozone nations of Spain, Italy or Portugal fared relatively well.
“Ultimately, the values for public pension liabilities that Edhec-Risk Institute has calculated can lead to solvability analyses that are substantially different from those habitually taken into account by rating agencies or investors, ” the study noted.
Using a 4% discount rate, the top ten least attractive nations in terms of public pension liabilities were ranked thus:
Luxembourg: 1280% of 2010 GDP
Belgium: 795%
Cyprus: 779%
Ireland: 670%
United Kingdom: 461%
Sweden: 450%
Slovak Republic: 431%
Denmark: 396%
Slovenia: 337%
Austria: 311%
For the full study and run down of European nations’ liabilities, click here.