Pension fund status

A file labelled Pensions

This year’s Corporate Knights Global 100 Most Sustainable Corporations ranking features a new metric by which companies are measured: Pension Fund Status. The metric was added as part of an ongoing evolution of the ranking and is calculated as follows:

Pension Fund Status = (Pension Obligations - Plan Assets) / Market Capitalization

The score for this metric is determined by taking (1 - the result of the above calculation) and percent ranking it against other same-industry group peers within theCorporate Knights research coverage universe.

The motivation for adding this metric to our analytical toolkit is two-fold. First of all, the performance of a defined benefit pension plan reflects an employer’s fulfillment of its social responsibilities, as a well-funded pension plan implies a commitment to the long-term security of its employees. Second, a pension fund’s performance can be a leading indicator of the ‘economic sustainability’ of a company. A significantly underfunded pension plan could lead to future financial obligations that may hinder an organization from pursuing its core mission.

As the calculation above implies, the metric applies to companies that have a defined benefit pension plan. Despite the secular trend away from defined benefit plans to defined contribution plans over the past decade, more than half of the companies in the Global 100 starting universe still had a defined benefit pension plan as of the end of 2011, as measured by disclosure of pension obligation data through Bloomberg. (The 2013 Global 100 starting universe consisted of approximately 4,000 global mid-cap and large-cap companies). The disclosure rate of the Pension Fund Status metric compares favourably to several of the other Global 100 metrics such as water productivity, waste productivity, and employee turnover. This data shows that the death of the defined benefit plan has been greatly exaggerated.

However, on the performance front, most of the defined benefit plans that we reviewed for the Global 100 project are under water, which is consistent with global trends. Fully 91% of companies with a defined benefit plan in the Global 100 starting universe that disclosed pension data had underfunded pensions in 2011. While this may, in part, reflect the increased challenges pension managers are facing in achieving target returns in the current market environment, clearly there are companies that are more adept than others at delivering returns (as 9% of these companies have fully funded pensions).

In our view, those companies with a strong sustainability ethos will be the same ones that are most motivated to fulfill their pension obligations. It is in the spirit of recognizing and rewarding these companies that we welcome the newest addition to the Global 100 Key Performance Indicator (KPI) family.

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Latest from 2013 Global 100


Starting universe: All companies that had a market capitalization in excess of $US 2 billion as

current issue