Pirelli’s first fiduciary year ends uncertainty

Light at the end of the tunnel for Pirelli

Flavio Cateni, chair of trustees and finance director at Pirelli UK, said stability from new inflation and interest rate hedges, as well as greater diversification, will prevent analysts and ratings agencies factoring in the worst-case scenarios of more volatile funding levels.

Under the advice and direction of Cardano, the four UK Pirelli schemes have brought in an interest rate (£600m) hedge for close to a third of their portfolio, with a swaption for another 35 per cent.

Inflation is hedged to 80 per cent of the portfolio through instruments such as synthetic break-even hedging. Volatility in investments has also been reduced by cutting equities from 60 per cent to 10-15 per cent and the expansion of a suite of fixed income and hedge fund strategies, including macro-orientated and multi-strategy funds.

Cateni said, for the sponsor, volatility of funding was more problematic than the scheme’s deficit itself.

“A deficit that could be lower or even greater is always a question mark. And every time there is a question mark
it means that third parties, the analysts, the ratings agencies will take the pessimistic view on this, more than what it would be fair to assume.

“In presence of a high degree of uncertainty they will evaluate the company an excessively prudent scenario. So, it is better to have the deficit fixed than to have this question mark.”

Cateni cited a report issued in August by Morgan Stanley, entitled ‘Who has the biggest pension risk in Europe?’

It showed the scrutiny now being applied to deficits of large companies and how the new stricter version of IAS19 could make deficits worse.

Though another equity analyst questioned how much impact Pirelli’s strategy would have on share prices.

Peter Elwin, head of European pensions valuation and accounting research at JPMorgan Cazenove, said: “A number of schemes are already applying hedging strategies that reduce the potential for sudden funding shocks but these strategies cannot be evaluated based on IAS 19 disclosures and so are not priced in by the equity market.

“However, if the hedging strategy also produces a clear benefit in terms of IAS 19 or is otherwise clearly communicated to the market via non-GAAP disclosures, then it may have a beneficial share price impact.”