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Major Pension Trend

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“Based on a study performed in 2006, our asset management group implemented certain changes in the long-run strategic asset allocations of the U.S. defined benefit pension plans. Specifically, we modified the target allocations to increase the fixed income exposure by 20% of total plan assets and to reduce the equity exposure by a corresponding amount. This change in strategic asset allocation was intended to significantly lower the expected volatility of asset returns and plan funded status, as well as the probability of future contribution requirements.”

General Motors 10-K for 2007

major pension trendIf this simple little chart looks more boring than most of the charts I’ve drawn the past month, then either it’s quite deceptive or else I need to find a different approach to tell its story, for it depicts one of the most significant current trends in pension plans: a massive shift away from common stock investment.


The bottom blue line represents the percentage of S&P 500 company’s defined benefit pension plan assets invested in fixed securities, generally long-term corporate and government bonds, at the close of fiscal years 2003 through 2007, when the fixed investment allocation finally moved above 30%. The top red line represents the percentage invested in equity securities, which held just above 60% until 2007, when it dropped toward 50%.

During the first few years after these disclosures were required by SFAS 132R, the two lines remained relatively flat. During the 2007 fiscal year, however, many companies have been following the lead of GM, moving massive amounts of pension money out of the stock market into bonds and other investments.

Massive amounts. For just our S&P 500 pension plan sponsors, we’re looking at about $70 billion taken out of the stock market. Tack on all other pension plans (non-S&P corporations, public pension funds, etc.), and it’s not unlikely that pension investment managers pulled more than $100 billion out of the stock market during 2007.

The flushing ain’t over yet. Look for our chart to carry its red line farther south as much if not more during 2008. And this transfer is long-term, if not permanent, versus some temporary timing move that might see the money coming back into the market anytime soon.

If supply and demand means much to the stock market, maybe we’re lucky that 2007 turned out to be more or less a sideways year for equities. Could it be that the real underlying trends pointed toward significantly better returns, but all the money being drained from the market kept dragging returns down? If so, then pray tell, what will the market look like if pension fund managers continue shifting out of equities while the economy moves into recession?

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Written by macheide

3 April 2008 at 5:56 pm

Posted in άctuary

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