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12/31 Pension/OPEB – 2/17 Update

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Updated for new data on Feb 19

For companies in our data collection universe (S&P Composite 1500 companies plus some extras, such as major insurance companies) that have a fiscal year ending December 31, we have now collected actual data from the 2008 annual statement for 45 companies, comprising just over 14.0% of our data (as measured on the basis of pension assets as of the close of 2007). Although basic trends for the full universe will vary slightly from the interim results collected to this point, the final picture continues to come into focus —

  • mvapbo090213Pension Funded Status. For this subset of 45 companies that have filed their annual statements by 2/17, aggregate funded status for global defined benefit plans, measured on the basis of projected benefit obligations (PBO, red squares) as compared with the market value of plan assets (blue diamonds), declined from 102.2% at the end of 2007 to 77.1% at the end of 2008. In the aggregate, the subset lost $56.673 billion in PBO funded status during 2008, suggesting the aggregate loss in funded status for the entire universe may top $400 billion. Under prevailing accounting standards, that pension funded status loss (net of tax timing differences) has directly hit corporate balance sheets as a decrease in shareholder equity.
    Funded Status – Market Value of Assets vs Projected Benefit Obligations
    2/17 Subset of 12/31 Filers 2004 2005 2006 2007 2008
    Market Value of Pension Assets ($ billions) 175.508 193.235 216.933 231,817 173.834
    Projected Benefit Obligations ($ billions) 202.611 217.327 226.537 226.869 225.559
    Aggregate Funded Status ($ billions) (27.103) (24.092) (9.604) 4.948 (51.725)
    Aggregate Funded Ratio 86.62% 88.91% 95.76% 102.18% 77.07%

    Whereas 40 of the 45 companies had pension assets in excess of PBO at the end of 2007, only 2 had such a surplus at the end of 2008.
    As has been frequently noted in our posts, the aggregate funded status of all global pension plans includes foreign pension plans, which generally are less well funded than comparable U.S. pension plans, and supplemental executive retirement plans, which usually are completely unfunded. The aggregate funded status of qualified U.S. pension plans would be about 5 percentage points above the global results.

  • Pension Plans with Unfunded ABO. As noted in an earlier post, although the aggregate PBO funded status provides a useful comprehensive snapshot of pension health, that number combines all pension plans across all companies, as if the surplus of one pension plan could be easily used to offset the deficit in another pension plan. Looking solely at pension plans that have assets less than accumulated benefit obligations (ABO), the 2/17 subset reported a deficit of $34.838 billion at the close of 2008, versus a deficit of only $9.041 billion at the end of 2007.
    Plans with Accumulated Benefit Obligation Less Than Market Value of Assets
    2/17 Subset of 12/31 Filers 2004 2005 2006 2007 2008
    Market Value of Pension Assets ($ billions) 64.926 58.555 38.641 27.947 152.695
    Accumulated Benefit Obligations ($ billions) 80.017 71.318 48.389 36.988 187.532
    Aggregate ABO Funded Status ($ billions) (15.091) (12.763) (9.747) (9.041) (34.838)
  • Pension Asset Return. For the 2/17 subset, the actual rate of return on pension assets during 2008 was -19.88%, significantly below the 10.02% rate of return experienced during 2007 and ending a five-year streak of excess gains.
  • Expected Rate of Return on Pension Assets. For the 2/17 subset, the asset-weighted expected rate of return on pension assets used to measure pension cost for 2008 was 8.13%, down slightly from the 8.31% assumption used for 2007 costs. Under prevailing accounting standards, this assumption is set at the beginning of a fiscal year and reflects long-term expectations, versus the retrospective one-year actual rate of return indicated above. Even so, expect to see very strong pressure on companies to reduce their expected return assumptions for costs during 2009.
    Expected Return vs Actual Return on Pension Assets
    2/17 Subset of 12/31 Filers 2004 2005 2006 2007 2008
    Expected Return on Assets ($ billions) 13.784 14.549 15.920 16.991 16.990
    Actual Return on Assets ($ billions) 19.575 19.989 23.908 21.410 (44.784)
    Expected Rate of Return 8.62% 8.54% 8.46% 8.31% 8.13%
    Actual Rate of Return 12.60% 11.46% 12.38% 10.02% -19.88%
  • Pension Asset Allocation. For the 2/17 subset, the asset-weighted allocation to equity investments dropped to 40.6% at the close of 2008, down from 53.0% at the close of 2007. In contrast, the allocation to bonds and other fixed investments rose to 42.7% from 33.5%. Although some of the decline in equity investment allocation is the natural result of sharply lower stock prices, a material portion of the drop can also be attributed to a permanent reallocation as many pension fund managers pursue new liability-matching strategies.
  • mvapbo090213Employer Contributions. For the 2/17 subset, employer contributions (blue diamonds) to global pension plans increased to $4.964 billion during 2008, up slightly from $4.481 billion during 2007. We expect the aggregate employer contribution for the entire universe to be relatively level or slightly decreasing, but certainly not yet showing the wildly exaggerated predictions of dire drains on corporate cash that were widely publicized late last year. Similarly, despite the drastic losses in pension funded status during 2008, enormous credit balances accumulated by many of the largest companies during the early years of the decade should continue to moderate aggregate pension contribution increases during 2009 to levels significantly below most of the warnings being broadcast.
    Employer contributions to pension plans during 2007 and 2008 can be considered as comprising four different classes of pension plans: (1) Non-qualified supplemental executive compensation plans, for which employer contributions primarily represent payment for benefits of previously retired corporate officers; (2) Foreign pension plans, which are not subject to U.S. funding rules; (3) Domestic qualified pension plans of smaller employers, which generally did not make large advance contributions earlier this decade; and (4) Domestic qualified pension plans of larger employers, many of which did make large advance contributions earlier this decade. Employers’ pension contributions during 2008 for the first 3 of these classes generally remained at or slightly above the 2007 contribution levels; while contributions for the 4th class generally dropped or remained at zero, as those plans took “contribution holidays” reflecting the advance contributions.
  • Pension Cost. Since current accounting standards defer and smooth pension experience, for the 2/17 subset the net periodic pension cost (red squares in the graph provided under the employer contribution section) for 2008 was $1.739 billion, down significantly from the $3.650 billion cost for 2007. Thus, as bad as 2008 was both for pension plans and for pension plan sponsors, corporate earnings were actually helped by pension plans during 2008, at least as compared with the previous year.
    As discussed in a previous post, some critics of prevailing pension accounting standards suggest that all pension experience should be recognized immediately. If that accounting had been used for all years, then for the 2/17 subset the 2008 pension cost would have been $58.727 billion, versus a pension income (i.e., negative pension cost) of $9.309 billion for 2007.
  • Discount Rate Assumption. For the 2/17 subset, the obligation-weighted discount rate used to measure PBO as of the close of 2008 was 6.25%, up slightly from the 6.15% discount rate assumption at the close of 2007.
  • OPEB Funded Status. For the 2/17 subset, the funded status of other post-employment benefits (OPEBs, primarily retiree health insurance benefits) declined by only $1.323 billion during 2008, only about 2% of the drain on shareholder equity from pension plans. Since OPEBs are significantly less funded than pension plans, OPEB funded status did not suffer as much from 2008’s bad investment experience as did pension plans.
  • OPEB Employer Contributions. For the 2/17 subset, employer contributions to OPEBs decreased slightly to $1.788 billion during 2008, down from $1.869 during 2007.
  • OPEB Cost. For the 2/17 subset, net periodic benefit cost for OPEBs decreased to $2.050 billion during 2008, down slightly from $2.306 during 2007.

(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

17 February 2009 at 5:17 pm

Posted in άctuary


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