Defined benefit super liability soars to $25 billion

The liability amount from Australian listed companies’ unfunded defined benefit superannuation has shot up to an estimated $25 billion driven by falling interest rates and values in financial assets.

The figure jumped from a modest shortfall of less than $2 billion at June 30, 2008, just prior to the worsening impact of the financial crisis, until December last year, according to a Watson Wyatt survey of Australian listed companies.

“At 30 June 2008, the companies in the study were holding $58 billion in defined benefit superannuation liability and backing that with $56 billion in assets,” Watson Wyatt principal David McNeice said.

“What happened in that second six months was unprecedented,” McNeice said.

“The results have not been fully disclosed yet, but our analysis shows that the modest shortfall of less than $2 billion would have increased to about $25 billion over that six-month period, driven by a combination of falling interest rates and falling values in financial assets.”

Despite a perception that defined benefit superannuation had largely disappeared from the Australian market, the study shows the numbers involved were still significant and required careful ongoing management.

“By international standards, the Australian position is actually relatively strong,” McNeice said.

He said there was also evidence that sponsoring companies and trustees were taking the necessary steps to restore the position by working together to implement an actuarial funding program that may involve additional contributions over a period of time and a “re-think of the investment policy”.