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Pension Contribution Forecasts

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Recently I’ve been seeing news articles projecting significant increases during 2008 for employer contributions to defined benefit pension plans, presumably by employers seeking to fill the hole left by huge net investment losses. Some even casually refer to 2008 contribution increases as if already fact rather than projections of rough estimates. And many foresee a pension contribution tsunami for 2009, in many wild-eyed instances nearing or even exceeding the entire amount of 2008’s net funded status loss, as if employer’s were going to be forced to make up the deficit out of pocket all in one single year.

Not. Just one hobbyist’s opinion, but I’ll believe it when I see it. And I strongly doubt I’ll see it. Very strongly doubt it. It simply won’t happen.

Early indications gleaned from anticipated contribution amounts reported in 2007 fiscal year annual statements, from quarterly financial reports during 2008, and from 2008 fiscal year annual reports for companies with non-calendar fiscal years through August 31 point to an employer contribution decrease of as much as 20% form 2007 levels. And the percentage decline would be even more extreme were it not for supplemental executive retirement plans and foreign pension plans. For very many of the domestic qualified pension plans, employers have telegraphed intentions to continue to live off credit balances built when GAAP minimum liability rules forced huge advance contributions. And with cash short, credit non-existent, and a dangerous recession looming, don’t expect employers to loosen up on the purse strings more quickly than is absolutely necessary during 2008, investment losses be damned.

One need not go to the extreme of inspecting the entire S&P 500 or Fortune 1000 or S&P Composite 1500 as I do. Just start with my dozen “elephants in the bath.” GM will contribute to its foreign plans and SERPs, yes, but not a penny beyond that, not at the same time they’re curtailing 401(k) matching contributions and scurrying up Capitol Hill to fetch a pail of bailout. Ditto Ford. IBM and Exxon Mobil aren’t asking for bailout booty (yet), but they likewise aren’t going to be dumping new money into their qualified domestic plans. Ditto most if not all of my other “elephants.” And if those big boys are going to be holding back, one can’t get to an overall pension contribution increase for 2008 without estimating an inordinately huge boost immediately for most if not all smaller employers. A boost for which there simply exists no evidence as of yet.

Nor do I anticipate any huge employer contribution increase for 2009 fiscal years, even with the significant erosion in pension funded status during 2008. A moderate overall increase, at most perhaps back up to 2007 levels, with perhaps isolated employers facing contribution increases significant to give them new pause to their pension plan sponsorship, but nowhere near the broad, enormous increases being bandied about.

Meanwhile, what I haven’t yet seen any press at all on: how phase 1 of new pension accounting rules sends net pension funded status losses such as those suffered during 2008 straight to corporate balance sheets, hitting shareholder equity directly, technically tipping some companies into insolvency. Even that won’t send those employers scurrying to dump company cash into the pension trust funds, since that’s pretty much only robbing peter’s side of the balance sheet to pay paul’s side. But together with employer aversion to the extreme volatility in pension funded status this past month, that shareholder equity bombshell – more than any moderate increases in pension expense or any delayed calls on employer cash – might bring on renewed pension freezing.

(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

20 November 2008 at 3:03 am

Posted in άctuary


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