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Archive for December 18th, 2008

Merging Pension M&A Data

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H-P without EDSFor fiscal years ending on or around October 31, peeking through the pension disclosures for companies that have filed their 2008 financial statements produces this preliminary chart for pension assets (blue diamonds) and projected benefit obligations (red triangles) for the five years ending 2004 through 2008. As expected, the surplus pension assets of 2007 have disappeared.

But this chart should look wrong to anyone who knows what’s been going on during 2008. For although pension assets do drop back below pension obligations, both the assets and obligations appear to be increasing quite vigorously during 2008. Pension assets up?? That can’t be right.

And it’s not. That preliminary chart includes a very huge chunk of assets and obligations for 2008 that is not included for any of the earlier years in the chart, as though billions of pension matter just exploded on the scene out of nowhere. Except it’s not exactly difficult to locate the source of the “magic” appearance: as of August 26, 2008, Hewlett-Packard completed its purchase of Electronic Data Systems Corporation. H-P includes the huge EDS pension numbers within its 2008 year-end numbers, but of course does not restate prior years’ numbers to reflect EDS.

So those 2008 “increases” in pension assets and liabilities seen on that preliminary chart do not reflect solely the investment return and actuarial gains or losses and benefit payments and plan amendments and other transactions with respect to the previous year’s assets and liabilities. Rather, you get an amalgamate of those changes mixed in with the superimposed jolt of pension plans that had not been reflected at all in the earlier years’ data used for the chart. Although that technically reflects the real situation to a degree – after all, H-P did not in fact have the EDS pensions for the previous years, and this chart consists almost entirely of H-P data – still, the conclusions drawn from such a chart with respect to just the pension experience can be quite misleading.

H-P with EDSAdding the EDS pensions back into the data for pre-2008 years gives us a clearer picture of what happened to the pension plans themselves, as illustrated by this revised chart. Indeed, this “clearer picture” relatively closely mirrors the overall experience that is expected to emerge for either the entire universe of global pension plans for all companies, or for the typical single pension plan within any given company. Here, as before, pension assets drop below pension obligations. But the crossover comes as pension assets and pension obligations both decline from 2007 levels: the assets declining primarily due to poor investment experience during 2008, while the obligations dropping via a combination of re-measurement at higher interest rates and pension plan freezes.

Throw enough “elephants” like General Motors, IBM, Ford, GE, and Exxon into the bath – all companies where any corporate mergers or acquisitions have not been as material as the H-P/EDS transaction – and the distortion to your charts can elude detection, as has been the case for one of the most widely publicized pension studies for years (no Marjorie, not yours, unless they’ve forgotten the original practices). So expect that faulty study’s 2008 edition to report a drop in pension assets and liabilities that is less than the real drop, only because its analyst will be pretending that the EDS pension plan (and others like it, for all the other companies – think “banks” here – that were swallowed up by 2008 M&A activity) did not exist before 2008. The peculiar footnote being that most if not all of the data like that of the EDS pension plan was in that study’s 2007 edition and earlier editions, yet will be excluded from pre-2008 years for the 2008 edition, simply because it was not labeled “H-P” (or whoever the new parent is) for those earlier editions.

Nobody will notice the distortion. And even fewer (yes, fewer than nobody) will care. And some will actually make decisions based on the faulty report and its misleading analysis. Yet the second chart, not the first, is the one that matters most to pension policy and practice.

(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

18 December 2008 at 9:48 pm

Posted in άctuary

A Welcome S&P500 Change

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As of December 18, the S&P 500 includes Equitable Resources Inc. in lieu of Transocean Inc.

S&P says that Transocean is in the process of “redomesticating” (ummm, who stole S&P’s dictionary of real words?) to Switzerland, which would render the company ineligible to remain in the S&P 500. That won’t change its U.S. pension exposure unless and until it freezes or terminates its U.S. pension plans. And won’t change my own interest in including the company among the many off-list companies I do keep track of.

Still, it will be nice not having Transocean taking up a desk in my S&P 500 classroom. And my fare-thee-well has nothing to do with the fact that the aggregate funded ratio of global pension plans sponsored by the S&P 500 edges up a smidge with Transocean’s departure. My pet peeve with them: among S&P 500 companies that sponsor defined benefit pension plans, Transocean had been among the worst for attempting to collect detailed information about their pension plans from their corporate financial statements. (The prize for the absolute worst goes to Sprint Nextel, hands down.) Does the second S in the acronym SFAS 87 hold any meaning at all, one has to wonder.

(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

18 December 2008 at 6:24 pm

Posted in άctuary

Nearly Settled

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Only two more weeks to go in this wild year. In fact, we’re already seeing some of the financial statements for fiscal years ending on or around October 31 (e.g., Hewlett-Packard). But although usually by this point we’d have a fairly good idea where pension funded status for the full year might likely steer by December 31, the past few months we’ve seen many a two-week period that can significantly move the numbers.

Even so, it’s highly improbable that the fog will suddenly lift to reveal that springtime has burst upon us. So it’s not reaching too far to acknowledge that 2008 will have delivered us the worst drop in pension funded status ever witnessed. For S&P 500 companies, the decline will likely exceed $200 billion (although the majority of that drop has come after September 30, so not justifying a heavily publicized exaggerated estimate that pegged the loss as exceeding $200 billion even before September 30). And remember, that $200 billion hit is charged immediately and directly against shareholder equity.

The Fed’s recent aggressive moves to combat our economic woes, including dropping interest rates to the zero percent floor, has probably erased any foreign plan offset we might have expected from the dollar’s gains earlier during the year. And as I’ve previously speculated, don’t expect to see many employers pony up extra contributions to their pension funds, even via company stock, at least not in 2008. Last but far from least, as stock prices have floated up ever so mildly from the dark basements visited in November (possibly signaling that at least for now, current assessments of higher economic risk have been priced in) while Treasury yields have continued downward, corporate bond yields have reflected those two forces by slipping, thereby erasing or reversing any help on the pension liability side of the equation.

All pointing toward an aggregate funded ratio for global pensions in the low 80s, perhaps even down to the high 70s, to close out 2008. Of course we’ll know that better after 2008’s final fortnight.

(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

18 December 2008 at 5:39 pm

Posted in άctuary