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Early Glimpse of 2008 Pension Experience

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For S&P 500 companies that sponsor defined benefit pension plans and have released annual financial statements for non-calendar fiscal years ending in 2008, for fiscal years 2004 though 2008 this chart shows aggregate net periodic pension cost (red diamonds), actual investment return on pension fund assets (purple triangles), and employer contributions (blue squares).

Net Periodic Pension Cost – Determined using the deferral and smoothing methodology prescribed by SFAS 87, pension cost continues downward during 2008 from the 2007 levels. Regardless of experience during the remainder of 2008, this trend is representative of the entire S&P 500 universe, reflecting amounts that were predetermined as of the close of the 2007 fiscal year – increased credits from higher expected return on pension assets, emerging gains recognized from recent years via the smoothing techniques, and lower service costs for benefits accruing in 2008 (e.g., in part lower due to widespread pension freezes).

Actual Investment Return on Pension Fund Assets – Pension fund investment experience during 2008 for the entire S&P 500 will depend largely on whether the financial markets recover during the second half of the calendar year (a turnaround that I personally do not anticipate seeing). For this subset of companies that have reported their 2008 fiscal year-end results, the aggregate investment return for pension funds remained positive, although many of the companies had pension funds that did lose money during the most recent year. As noted in a previous aftermath post, the adverse investment experience for pension funds during 2008 has slightly eroded pension plan’s funded status.

Employer Contributions – By and large, employers are not making up for adverse pension fund investment experience by boosting employer contributions made to the pension fund. Indeed, as suggested by this subset and as I anticipate seeing for the entire S&P 500 universe, employer contributions for 2008 will be lower than for 2007. Many employer significantly increased contributions during the early years of this decade in order to avoid minimum liability under then-applicable GAAP, as a byproduct building up significant credit balances under ERISA funding rules. With the minimum liability rules now eliminated and PPA changing the game for credit balances, those employers have no incentive to contribute any more than the bare minimum, which for many companies is no more than the amounts required for non-qualified supplemental executive retirement plans or for foreign pension plans subject to different funding rules.

(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

2 September 2008 at 10:10 pm

Posted in άctuary

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