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Not Quite

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When attempting to gauge the pension funding damage done so far by the credit crisis and market turmoil, “not quite” getting it right can lead to analysis very badly wrong.

Just to point to a few figures that have made recent press –

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Pension funds of S&P 500 companies have 61 percent in equity, 28 percent in fixed income, 4 percent in real estate and 7 percent in other investments.

Not quite. If you haven’ve updated your investment mix data since about Labor Day 2006, yeah, pretty close. And if pension investment policies had remained intact since then, you could even extend the stable investment allocations that had remained relatively constant for the decade through 2006 and not be too far off in your estimates. If if if . . . but that’s not reality. As big an elephant in the bath as GM is, the auto maker is far from being the only S&P 500 company to announce a permanent restructuring of pension investments, toward sharply reducing equity investments. So by the close of 2007 fiscal years, S&P 500 companies had reduced their pension invesments in equities to 55.5%. And continuing the shift into 2008, by mid-2008 before the worst of the market tailspin, it’s quite likely that the equity allocation for pension funds of S&P 500 companies drew as low as 52-53%. Still high enough for pension funds to have been hit hard by the market crash, to be sure, but nowhere near the exposure that the badly outdated 61% allocation figure would suggest.

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At the end of 2007, S&P 500 companies’ pension plans were overfunded by $63 billion.

Not quite. That figure is the result of some of the most extraordinarily poor data collection and analysis that aftermath’s author has ever seen: double-counting data for Kraft and Tyco; inflating data for Ford, Halliburton, and Trane; ignoring data for Big Lots, Brown Foreman, Computer Sciences, Conagra, Constellation Brands, Darden, Dillard’s, Fedex, General Mills, Heinz, Kroger, Macy’s, McKesson, Medtronic, National Semiconductor, J.C. Penney, Precision Castparts, Supervalu, and Tiffany; buying into Sprint Nextel’s ludicrous decision to wave off upwards of $200 million of pension underfunding; ignoring the foreign pension plans of Marsh & McClennan; and assorted other missteps. That the report comes anywhere close to the actual number is almost coincidental, although getting it right for most of the dozen elephants in the bath does tend to gloss over even gross blunders made with the data for the other 350 pension sponsors among the S&P 500.

The actual level of pension assets in excess of projected benefit obligations for the S&P 500 as of the close of 2007 was about $60 billion, give or take some depending on any fiscal year shift used for your data collection. And that’s if one simply collects data from financial statements, without projecting pre-12/31 data to update the numbers to 12/31 – an update that ought be performed if one is then going to attempt to compare that number with where things stand at some current point in time. Using version 3 of the APM, you can knock another $3 billion off the estimated pension surplus as of 12/31/2007 for the S&P 500, down to about $57.4 billion.

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The defined benefit plans of companies in the S&P 500 are now underfunded in excess of $200 billion.

Not quite. This time, said with tongue tucked very deeply in cheek. Start with faulty data and bad analysis, add obsolete information about asset allocations, neglect remeasurement of pension obligations to reflect higher corporate bond rates, ignore the currency boost for foreign pension plans from a strong dollar, forget the flattening of pension obligations due to frozen pension plans, and assume the worst of everything else in the math, and yeah, maybe a $200 billion figure can be fabricated. But if all S&P 500 companies were to publish their pension footnotes as of this moment in time, that is very distant from the figure we’d see.

Version 3 of the APM estimates the underfunding on last Friday as being at the worst level for the year: about $145 billion. I continue to refine the APM through further versions of detail, and any such index will never estimate the numbers as precisely as a full actuarial valuation would produce; but almost like one of those presidential polls might put a range around its predictions of next week’s elections, I find negligible likelihood that the real number is outside a range of plus or minus that $145 billion.

(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

28 October 2008 at 5:17 pm

Posted in άctuary

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