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2008 PBO FS Down, As Expected

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As has been widely expected, the funded status of defined benefit pension plans has declined during 2008. This graph shows the market value of assets (blue circles) and the projected benefit obligations (red squares) for the subset of S&P 500 pension plan sponsors with fiscal years ending June 30 that have released their 2008 financial statements by today, showing aggregate amounts as of the close of fiscal years 2004 through 2008.

As noted in a previous aftermath post, the PBO funded ratio for companies with 6/30 FYE has been lower than that for the entire universe of all S&P pension plan sponsors. But as had been the case for the entire S&P 500 universe, the funded status had steadily improved during recent years through the close of 2007. The 2008 economy has reversed that trend. For this particular subset, asset values were almost flat during the past year, while liabilities as measured by the PBO increased. The result for this subset was a decline in the PBO funded ratio of about two percentage points, from 91.9% for 2007 to 90.0% for 2008.

Unless markets reverse the experience of the first half of calendar year 2008, expect to see a drop of 2-5 percentage points in the PBO funded status to be representative of the entire S&P 500 universe for 2008. For the entire S&P universe, that would drop the aggregate PBO funded status to about 100% by the close of 2008.

The biggest culprit in the 2008 erosion in pension funded status is, of course, adverse investment experience, with many pension funds reporting negative actual asset returns for the first time since 2002. Declining interest rates are playing less a role in pension funding status erosion, since spreads between government bonds and corporate bonds (which are the basis of the discount rates used to measure pension obligations) have widened significantly during 2008. Employers generally have not increased contributions to pension funds significantly during 2008, leaving pension funded status directly exposed to the asset losses. Remember, however, that since net periodic pension cost delays and smooths the current year’s experience, the current declines in pension funded status will not send 2008 pension cost higher; rather, reflecting the favorable experience of previous recent years, the aggregate 2008 pension cost will be materially lower than the 2007 pension cost.

(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.)

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Written by macheide

27 August 2008 at 8:20 pm

Posted in άctuary


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