Pension & OPEB Cost & Cash

This chart shows trends for 2003 through 2007 for net periodic cost and employer contributions for defined benefit pension plans and other post employment benefits (“OPEBs,” primarily representing retiree health benefit plans) for S&P companies.

Pension Contributions – dark blue line with shadowed diamonds, the highest line on the chart. Prior to 2007, the GAAP rule on minimum liability formed a perfect storm, together with poor investment returns against low interest rates, as the main incentive behind significant voluntary contributions made by employers to their U.S. qualified pension funds. Now that SFAS 158 has removed the minimum liability rule, employers have been able to use credit balances to go on contribution holidays for those pension plans, giving the nonqualified supplemental executive retirement plans and foreign pension plans greater weight in setting the emerging trend for cash contributions. Expect the 2008 employer cost to level out as compared to the decline of 2007 from the levels of earlier years.

Net Periodic Pension Cost – red line with shadowed triangles, the second highest line on the chart. Not nearly as archaic nor as misleading as the mob of pension GAAP detractors pretend, recent pension cost trends primarily reflect the delayed, smoothed experience of the past five years of experience. As market losses and remeasurement losses from falling interest rates from the early 2000s were spread through cost, the amounts steadily rose. Now that most of the losses from those years have been recognized and the market gains and remeasurement gains from rising interest rates in the past two years begin to flow through costs, 2007 saw pension costs turn back downward. Watch for the 2008 cost to carry that line in the same direction at pretty much the same pace of decline seen last year.

OPEB Cost – orange line with unshadowed circles, the third line from the top of the chart. Overall OPEB plans are significantly less well funded than pension plans, so investment gains or losses that get spread through costs are less, yielding a trend with lower volatility than for pension costs. Much of the decrease in the past two years has emerged from a combination of curtailments in retiree health programs and rising interest rates. Expect the trend line to level out somewhat for 2008, which should give us 2008 cost numbers for pensions that will be nearly equal to OPEB cost, as was the case back in 2003.

OPEB Contributions – purple line with unshadowed squares, the lowest line on the chart. With many employers handling OPEBs on a pay-as-you-go basis, and since no minimum liability rule had ever been imposed on OPEBs even before SFAS 158, cash contributions for OPEBs have consistently been lower than OPEB costs, and should remain so even with probable increases in OPEB contributions for 2008.

(Remember, as I’ve previously observed, posts such as this represent efforts of my favorite pastime. My formal work does not involve any of this, and none of it represents any position or comment that should in any way be attributed to my employer. Likewise, as always, it represents general personal impressions and should not be treated or used as formal professional advice.)