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S&P 1500 Pensions Not Quite That Bad

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Yes, 2008 was the worst year in the history of pension plans. But it wasn’t as bad as recent press, based on some rather loose estimates, suggests.

  • Funded Better than 75% – The aggregate funded status of global pension funds for companies in the S&P Composite 1500 was about 80% as of the end of 2008 (and more like 82-83% if we rely solely on annual statements as of fiscal year ends, without projection of non-calendar fiscal years), not the 75% being estimated in recent press. Moreover, as is frequently stressed here, those figures should not be reported without emphasizing the PBO basis that includes future anticipated salaries and uses different measurement rules than for pension plans’ minimum funding standards, without emphasizing the inclusion of foreign pension plans that are typically less well funded than comparable U.S. pension plans, and without emphasizing the inclusion of unfunded supplemental executive retirement programs. Coming on the heels of recently enacted pension relief legislation for which an 80% funded status is a crucial threshold for qualified domestic pension plans, underestimating pension funding at 75% without stating the basis of that number isn’t merely misleading; it’s just plain wrong.
  • Pension Cost Half of $70 billion – We’re seriously jumping the gun to be winging estimates on pension cost for 2009, but that hasn’t stopped presumptive experts from shooting wild numbers up into the air. The most recent bad guess pegs 2009 pension cost up at $70 billion for the S&P Composite 1500. The actual pension cost for that set will break just over half that unfounded exaggeration, but not much more than that. That’s still going to pinch pension plan sponsors: were it not for the 2008 meltdown, pension cost for 2009 probably would have declined slightly from 2008 levels, as SFAS 87 techniques for smoothing and deferral of pension experience continued catching up from the pre-2007 period when we were deluding ourselves into believing in bright futures. But pension costs have never reached $70 billion before, and won’t reach even close to that this year.
  • Pension Cost Increase Only About Double – Given how dark these recent reports paint things for current funded status and pending costs, surprisingly the same reports materially underestimate the pension cost figures for 2008, gauging that figure way down at only $10 billion. Push that number up closer to reality, together with our previous correction of their 2009 pension cost exaggeration, and we’re likely to see costs for 2009 at about double the level of 2008. And before we decide that cost doubling still justifies that ill-considered relief legislation, note that we’re only returning to a net pension cost that is at about the same level as pension plans’ service cost, which might reasonably be considered a long-term “pro forma” level. Prepay a few years’ worth of your mortgage, use your advance mortgage payments to take a holiday from your mortgage bills for the last half of 2008, then resume normal payments in 2009, and the “doubling” of your 2009 mortgage payments over what you shelled out in 2008 doesn’t mean that your 2009 bills are excessive.

None of this will come back up in the press. Like how Bloomberg doesn’t bother to apologize for wasting some of its airtime last summer on a prognosticator who was dead certain the Dow was ready to bounce from its 11k levels up to 16k and beyond. Like how the prestigious consulting firm that estimated pension funded levels at 110% last year when all evidence pointed to a number closer to 105% never bothered issuing corrections nobody expected them to issue anyway. Like how one of the top credit agencies persists in distributing extremely flawed pension funding reports year after year after year to press and policymakers and others who rely on the status name of the firm rather than on the quality of the product. Ditto here.

Pension funded status will get worse before it gets better, so we do expect we’ll see that 75%, perhaps even for qualified domestic plans measured on an accrued benefits basis using minimum funding standards measures. And although we will not see pension costs $70 billion unless and until FASB completes phase 2 of its pension accounting project, costs will rise through the next several years under existing GAAP. And the hit to shareholder equity and the volatility to corporate earnings and all the other economic pressures will push more pension sponsors toward freezing or terminating their pension plans.

All suitably gloomy, to be sure. Just, it’s not yet as bad as the press is being fooled into thinking it already was.

(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

9 January 2009 at 4:30 pm

Posted in άctuary


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