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Archive for October 16th, 2008

Aftermath Pension Metric

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As of October 31, 2008, the aggregate funded status of global defined benefit pension plans maintained by S&P 500 companies stood at almost exactly the same level as at the beginning of 2007, 22 months earlier, as indicated by the Aftermath Pension Metric. After increasing to over 108 during mid-summer 2007, the APM dropped to about 96 by the close of October 2008. The recent erosion in pension funded status is largely attributable to declining equity values, partially offset by the effects of rising corporate bond rates and a rising dollar. Volatility of the APM increased sharply during October 2008, but overall still extending the current downward trend.

As frequently observed, these numbers include foreign pension plans (which generally are less well funded than comparable U.S. plans) and supplemental executive retirement plans (“SERPs,” which typically are not funded at all). So although the global amounts are relevant to the overall financial status of the companies, only when the APM starts slipping into the purple, orange and yellow regions on this chart – as it briefly did during mid- to late October, returning in November – does the aggregate funded status for U.S. qualified defined benefit pension plans actually dip below 100%. As the third quarter of 2008 closed, for S&P 500 companies, pension liabilities exceeded the market value of pension assets by about $57 billion – a serious hole, to be sure, but far less than some exaggerated reports over-estimating the deficit at more than $200 billion, and all the more moderated by the fact that most of the $57 billion deficit is attributable to foreign pension and SERP obligations.

Although pension funded status is lower than it was at the beginning of 2008, net periodic pension cost for 2008 will not increase, but rather will decrease from 2007 cost levels, since GAAP under SFAS 87 defers and smooths the recognition of net losses such as have been experienced during 2008. Moreover, since many companies accumulated significant credit balances during the past decade, companies generally will not be increasing employer contributions during 2008 to take up the slack.

This post will be updated continuously as new data emerges.

Further details on APM methodology are provided in the APM document.

(Remember, as I’ve previously disclaimed, 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

16 October 2008 at 5:58 pm

Posted in άctuary