Impact of funding risk

Interesting material our way comes! Watson Wyatt has had a close look at the funding status of Fortune 1000 companies 2004 - 06 with effective numbers becoming available for 2006 thanks to FAS 158. WW has developed a Pension Risk Index, which estimates the loss of the pension plan in percent of the corporate's market cap at a 5% probability of unfavourable market conditions, given the plan’s asset allocation, liability structure and sensitivity to interest rates.

An excellent article in the current issue of the Financial Analysts Journal goes an important step further: The author estimates the correlation between pension fund deficits and associated credit spreads. The results are statistically significant and show interesting characteristics: The sensitivity of spreads to unfunded pension liabilities is about five times larger for junk bonds than for investment grade bonds. Also, the sensitivity to pension liabilities is much larger than to ordinary long term debt - double for investment grade, triple for junk. The model was also run for samples from the UK and Japan, but those results only confirmed a generic sensitivity.

This is where the relevance of pensions for corporate finance becomes evident. We expect that the relevance will increase thanks to better, more relevant accounting information and increasing market attention.

Sustainability investing

In its 2007 Business in Society Anthology, The McKinsey Quarterly has - among numerous other interesting articles - an interview about Socially Responsible Investing with upcoming Nobel laureate Al Gore and David Blood, partners in Generation Investment Management.

In related news, the World Bank has identified impact and source vulnerabilities of the world's countries in order to delineate country stakes in upcoming climate negotiations. Countries with high source vulnerability face above average negative consequences of climate change measures, while countries with high impact vulnerability are expected to suffer most from the consequences of climate change. As shown on the map, the two types of vulnerabilities are far from congruent, which means that negotiations will be very difficult.

A directive formerly known as portability

The Commission has presented a revised proposal for what was known as the Portability Directive. The project for the portability of pension rights has met opposition from several quarters and therefore had to be tuned down considerably, especially removing portability and harmonisation.

Revised SWX Corporate Governance

The self-regulated Swiss Stock Exchange SWX has issued a revised commentary re Corporate Governance Directive that is binding for all companies listed on SWX. The most important changes are:

The comply or explain rule has been extended to contain a substantiated explanation of why the conflict of interest between the public interest in disclosure and the secrecy interest has been decided for the benefit of the latter. This explanation requirement weakens this important option substantially.

Principles and Elements of compensation or share-ownership programmes are explained and substantiated to make management compensation more transparent.

CFA Institute podcasts

The CFA Institute is revving up its web based offering with interesting educational audio content that you can subscribe to, a.k.a. podcasts. Right now, it's only the audio stream of presentations and articles, but I hope that the presentations will soon be complemented by the slides that the speakers talk about. Here are the links to the RSS feeds in iTunes: Conferences and Events, CFA Institute generated items, CFA Institute Pubs.