New Delhi: In the April-June quarter, Tata Steel Ltd noted that the employee pension fund of its British unit, the erstwhile Anglo-Dutch steel company Corus Group Plc., lost Rs5,352 crore because of its exposure to equity and other financial markets.
In the aftermath of what has been a sharp decline in global stock markets since then, it is likely that the fund took more hits.
This ripple effect on one of India’s blue chip companies is yet another illustration of the impact the global markets crisis will have on Indian entities even as stock markets rebound after governments pumped in hundreds of billions of dollars in liquidity.
While the performance of the fund for the July-September period will only be revealed when the company discloses the numbers, Tata Steel’s pension liabilities to Corus employees include defined benefit plans, where a company guarantees a certain level of pension payment regardless of the returns on investment.
This means that an erosion in pension funds’ “surplus” forces Tata Steel to offset the erosion in employees’ pension from its balance sheet.
However, this offset will not be reflected in Tata Steel’s profits because the company, which had followed Indian accounting rules in 2007 when the pension fund recorded an increase in its surplus, reversed its stance in 2008 and decided to adopt British accounting standards instead. British standards do not require Tata Steel to deduct pension fund losses from profits.
The Corus pension funds had an asset base of Rs1.2 trillion. The size of Tata Steel’s consolidated balance sheet on 31 March was Rs92,161 crore. Corus’s income also accounts for about 74% of Tata Steel’s consolidated total income.
Indeed, in its annual report for 2007-08, Tata Steel noted that “the market value of pension assets and liabilities is significantly greater than the net assets of Corus and therefore, any change can have a material impact on Corus’s financial statements as well as impacting the level of company pension contributions.”
Tough buy: Workers at the Corus steel plant in Ijmuiden, Netherlands. Tata Steel’s pension liabilities to Corus employees include defined benefit plans, where a firm guarantees a level of pension payment. Paul O’Driscoll / Bloomberg
A Tata Steel spokesman requested that
Mint send detailed questions to the company, promising a response. Eventually, Tata Steel declined to reply to the questions and cited the so-called silent period ahead of the scheduled announcement of its second quarter results on 24 October.
Mint has no independent way of ascertaining the impact of eroding stock markets during the July-September quarter, or beyond, on the Corus pension fund investments.
According to Andrew Watchman, executive director, international financial reporting at Grant Thornton International Ltd, typically when share prices fall, defined benefit schemes slip into deficit.