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Archive for December 23rd, 2008

APM Below 80

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APM 8-16-2006 to 12-19-2008

Although equity prices have recently taken a breather after freefall through autumn, December 2008 has not been kind to the funded status of pensions, as measured by the Aftermath Pension Index, shown above for August 2006 through the weekend before Christmas 2008. Erosion the past several weeks, arising primarily from increases in pension liability measurements on declines in corporate bond interest rates, has taken the aggregate funded ratio of global defined benefit pension plans of S&P 500 companies below 80%.

Although 80% is a critical threshold for funding rules, remember that the funded status measured for funding purposes differs from measurements made for the accounting purposes that are reflected in the APM. Moreover, as is frequently noted in these posts, the APM reflects financial reporting that includes foreign pension plans, which are frequently less well funded than are U.S. pension plans, and non-qualified supplemental executive retirement programs, which typically are completely unfunded. In contrast, the 80% funding threshold’s relevance is solely with respect to qualified U.S. pension plans, which would generally be better funded by about 7-8 percentage points above the APM. Even so, since the APM is an aggregate indicator, combining well funded pension plans with plans that are severely underfunded, an APM below 80% does suggest the likelihood of a material increase in the number of individual qualified U.S. pension plans that have actually slipped below the threshold.

One final observation to carry me up through the close of this crazy year: during a year such as we have seen during 2008, when interest rates for measuring pension liabilities and the investment returns during the year have carried the funded status for individual pension plans far from where they were as recently as even a month ago, realize that the APM (or any comparable index) leads the figures that would be compiled for an annual update, where the update relies solely on the data reported in corporate financial statements, without updating those numbers for subsequent economic activity. For instance, various annual reports of pension funded status for S&P 500 companies – the same universe as is used for the APM – rely on corporate financial statements for the most recent fiscal year, without update for subsequent activity. So, for example, for an S&P 500 company with a June 30 fiscal year end, such a study would use the 6/30/2008 pension data, whereas the APM has already incorporated that 6/30/2008 data, but then updated those amounts to reflect the adverse economic experience since 6/30/2008. In other words, given the experience in the APM throughout the year, I expect the APM as of 12/31/2008 to be materially lower – perhaps 3 percentage points – below the funded status that would be reported by a standard annual study. For instance, if the APM closes out the year at 77, then expect a standard annual study to report a funded status in the neighborhood of 80.

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

23 December 2008 at 11:34 am

Posted in άctuary