BOCHUM, Germany -- Ford CEO Mark Fields said rising pension costs as well as the Russian market slump led the automaker to scrap its profit target for its European business.
Ford said on Jan. 29 that its expects to narrow its 2015 pretax loss in Europe from last year’s $1.1 billion loss but the figure will be higher than the $250 million loss it previously projected.
A major factor behind lowering its guidance for Europe, according to Fields, was the effect on its pension costs caused by attempts from the world's central banks to drive down yields in fixed-income markets through an expansionary monetary policy.
“Interest rates have come down even since the guidance we gave in September, so that increases our pension costs,” Fields said on the sidelines of the CAR Symposium here on Wednesday.
Last month the European Central Bank announced it would expand its asset purchase program to a combined monthly amount of 60 billion euros, including for the first time a controversial decision to also buy European sovereign bonds. These purchases, known as quantitative easing, have already been widely employed by the U.S. Federal Reserve in order to stimulate the economy and fight deflationary risks after policymakers ran out of conventional tools as interest rates approached zero.
As the cost of borrowing falls over time, it becomes increasingly difficult for pension fund managers to meet their investment return targets as yields on long-term debt drop in accordance with central bank policies. This increases the present value of their future pension liabilities, prompting companies to top up their underfunded pension plans.
For example, a Ford investor presentation showed that the weighted average year-end discount rate for its non-U.S. plans decreased a full percentage point to 3.06 percent in 2014.
Ford has said it expects cash contributions to its worldwide pension plans will decline to about $1.1 billion globally compared to $1.5 billion last year.
Referring to the additional headwinds stemming from a plunging Russian car market, Fields said “those (two) are probably the biggest reasons why we revised our targets” for Europe.
Daimler's pension worries
Ford is not the only auto company affected by the heavy costs to pay for the retirement of its employees.