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Tata Steel Europe has pension obligations which may be impacted by recent market movements.
As per Tata Steel, IAS 19 pension assets and liabilities are valued on a quarterly basis and
deficits arising out of IAS 19 valuation are not to be funded immediately and hence there is no
cash flow impact.
Recent equity market correction may impact pension liabilities
Tata Steel’s European operations had around GBP 245mn of surplus as of June 2011
in its pension obligations.
As on March 31, 2011, the present value of Tata Steel’s post-retirement benefit
obligation was INR1137.6bn while the fair value of plan assets was INR1160.5bn,
resulting in a net asset of Rs22.9bn recognized on the balance sheet. With 29% of the plan
assets invested in equities at the end of FY11 (versus 27% at the end of FY10), the market value
of the assets in equity ~Rs336.5bn. We note that this is also assuming that the value of the other
assets in the plan portfolio remains the same. (Portfolio allocation: Equity – 29%; Bonds – 60%;
Property – 7% and Others(including cash) – 4 %).
However, since March 31, 2011 there has been erosion in European equity indices which
has raised concern about an impact on the valuation of Equity portion of the pension fund and
consequently on the total plan assets. After discussing with the company we understand that it is
premature to assign any value to gain or loss in total asset value as debt portfolio has been
gaining while equity portion has seen some erosion.
Final valuation is an actuarial exercise which is done every three years and in case of
deficit, if any, the funding of the same would be done in agreement with the trustees.
As per IAS 19, quarterly fluctuations are cash flow neutral for the company.
As per IAS 19 pension assets and liabilities are valued on a quarterly basis. Deficit
arising out of IAS 19 valuations are not required to be made good by the company.The
change in the value of plan assets will be reflected on the balance sheet and hence could impact
the shareholders equity either way -depending on loss or gain.
As per Tata Steel's latest annual report "the pension and other post retirement defined benefit
liability of the Company and Tata Steel Europe Ltd is computed and accounted for in accordance
with IFRS. IFRS permits the impact of changes in the assets and liabilities, inter alia due to
assumptions of variables like bond yield rates, inflation and demographic assumptions to be
accounted for in Reserves and Surplus. This practice is consistently followed by Tata Steel
Europe Ltd. The Indian Accounting Standard AS 15 is different from the above and requires such
changes to be accounted for in the profit loss account. Given the large share of Tata Steel
Europe Ltd., in the consolidated Profit and Loss account of the Company and the potential
volatility caused by periodic changes, the assumptions underlying the computation of the liability it
is not considered practicable to adopt a common accounting policy for accounting for the actuarial
gains and losses in respect of the pension and other post retirement defined benefit liability of the
Company and Tata Steel Europe Ltd."
The valuation of the plan liabilities are dependent upon factors such as discount rate, mortality
rate, inflation, wage increase assumption etc which keeps changing as per the market condition.
Similarly plan assets may undergo changes based on market conditions. As stated, in a year
while equity value may go down, the value of debt portfolio may appreciate.
We have a Hold rating on Tata Steel with TP of Rs470.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Steel Europe has pension obligations which may be impacted by recent market movements.
As per Tata Steel, IAS 19 pension assets and liabilities are valued on a quarterly basis and
deficits arising out of IAS 19 valuation are not to be funded immediately and hence there is no
cash flow impact.
Recent equity market correction may impact pension liabilities
Tata Steel’s European operations had around GBP 245mn of surplus as of June 2011
in its pension obligations.
As on March 31, 2011, the present value of Tata Steel’s post-retirement benefit
obligation was INR1137.6bn while the fair value of plan assets was INR1160.5bn,
resulting in a net asset of Rs22.9bn recognized on the balance sheet. With 29% of the plan
assets invested in equities at the end of FY11 (versus 27% at the end of FY10), the market value
of the assets in equity ~Rs336.5bn. We note that this is also assuming that the value of the other
assets in the plan portfolio remains the same. (Portfolio allocation: Equity – 29%; Bonds – 60%;
Property – 7% and Others(including cash) – 4 %).
However, since March 31, 2011 there has been erosion in European equity indices which
has raised concern about an impact on the valuation of Equity portion of the pension fund and
consequently on the total plan assets. After discussing with the company we understand that it is
premature to assign any value to gain or loss in total asset value as debt portfolio has been
gaining while equity portion has seen some erosion.
Final valuation is an actuarial exercise which is done every three years and in case of
deficit, if any, the funding of the same would be done in agreement with the trustees.
As per IAS 19, quarterly fluctuations are cash flow neutral for the company.
As per IAS 19 pension assets and liabilities are valued on a quarterly basis. Deficit
arising out of IAS 19 valuations are not required to be made good by the company.The
change in the value of plan assets will be reflected on the balance sheet and hence could impact
the shareholders equity either way -depending on loss or gain.
As per Tata Steel's latest annual report "the pension and other post retirement defined benefit
liability of the Company and Tata Steel Europe Ltd is computed and accounted for in accordance
with IFRS. IFRS permits the impact of changes in the assets and liabilities, inter alia due to
assumptions of variables like bond yield rates, inflation and demographic assumptions to be
accounted for in Reserves and Surplus. This practice is consistently followed by Tata Steel
Europe Ltd. The Indian Accounting Standard AS 15 is different from the above and requires such
changes to be accounted for in the profit loss account. Given the large share of Tata Steel
Europe Ltd., in the consolidated Profit and Loss account of the Company and the potential
volatility caused by periodic changes, the assumptions underlying the computation of the liability it
is not considered practicable to adopt a common accounting policy for accounting for the actuarial
gains and losses in respect of the pension and other post retirement defined benefit liability of the
Company and Tata Steel Europe Ltd."
The valuation of the plan liabilities are dependent upon factors such as discount rate, mortality
rate, inflation, wage increase assumption etc which keeps changing as per the market condition.
Similarly plan assets may undergo changes based on market conditions. As stated, in a year
while equity value may go down, the value of debt portfolio may appreciate.
We have a Hold rating on Tata Steel with TP of Rs470.
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