Draghi's Rescue Plan Has Created a $103 Billion Problem

S&P Says Sinking Bond Yields Have Worsened Pension Shortfalls

European Central Bank President Mario Draghi

Mario Draghi, President of the European Central Bank (ECB).

Martin Leissl/Bloomberg

There's a corner of the pension world that needs to brace itself for Mario Draghi.

His European Central Bank's 1.1 trillion euro ($1.2 trillion) bond-buying plan might have already blown a 92 billion-euro hole in defined-benefit pension plans by depressing bond yields, Standard & Poor's said Feb. 26. And if the actual start of QE pushes yields further, for longer, companies may have to take drastic measures to make ends meet, and could face a hit to their credit ratings.

The ECB is expected to announce further details of its asset-purchase program after it meets in Cyprus Thursday.

S&P estimates that the anticipation of quantitative easing in Europe squashed bond yields so much that the liabilities of defined-benefit pension plans rose by up to 18 percent last year. Its analysis looked at the top 50 European companies it rates that have defined-benefit pension plans and are "materially underfunded," meaning, the plans have deficits of more than 10 percent of adjusted debt, and that debt is more than 1 billion euros. In 2013, liabilities outstripped obligations for that group by more than 30 percent on average.

"The challenge for companies in coming years will be how to rein in plan deficits in the new post-QE low interest-rate environment in Europe," Paul Watters, credit analyst at S&P, said in a statement. "This will become a more material credit consideration where defined-benefit plan deficits are significant."

Among the measures S&P says companies may have to take to adjust to this new low-yield world are freezes on pensionable salaries, raising the retirement age, and closing plans to new or even to existing members.

And that's not the end of it. A potential cocktail of low bond yields, sluggish growth and faster inflation, which could result if QE fails to kickstart activity, could push those deficits out a further 10-15 percent.

"The risk remains that QE achieves nothing more than promoting stagflation in the euro area," Watters said. "A combination of weak growth, inducing the ECB to continue with its aggressive monetary-policy stance, and rising inflation would be a treacherous combination for DB-pension schemes already struggling to contain their plan deficits."

For more, read this QuickTake: Europe’s QE Quandary

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