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Archive for February 19th, 2009

20% of 12/31 Pension/OPEB Data

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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 70 companies, comprising over 20% of our data (as measured on the basis of pension assets as of the close of 2007). As most of the remaining 80% of the data floods in over the next week, basic trends for the full universe will vary only slightly from the interim results collected to this point —

  • mvapbo090213Pension Funded Status. For this subset of 70 companies that have filed their annual statements by 2/19, 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 104.4% at the end of 2007 to 76.7% at the end of 2008. In the aggregate, the subset lost $91.276 billion in PBO funded status during 2008, suggesting the aggregate loss in funded status for the entire universe may top $400 billion. Under prevailing accounting standards, that pension funded status loss (net of tax timing differences) has directly hit corporate balance sheets as a decrease in shareholder equity.
    Funded Status – Market Value of Assets vs Projected Benefit Obligations
    2/19 Subset of 12/31 Filers 2004 2005 2006 2007 2008
    Market Value of Pension Assets ($ billions) 262.962 284.538 320.160 344.416 252.643
    Projected Benefit Obligations ($ billions) 298.817 318.927 331.206 330.000 329.503
    Aggregate Funded Status ($ billions) (35.855) (34.389) (11.047) 14.416 (76.860)
    Aggregate Funded Ratio 88.00% 89.22% 96.66% 104.37% 76.67%

    Whereas 64 of the 70 companies had pension assets in excess of PBO at the end of 2007, only 4 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, i.e., about 82% for the 2/19 subset.

  • unfabo090219Pension Plans with Unfunded ABO. As noted in an earlier post, although the aggregate PBO funded status provides a comprehensive snapshot of pension health that is useful for some purposes, 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 (blue diamonds) less than accumulated benefit obligations (ABO, red squares), the 2/19 subset reported a deficit (orange circles) of $54.196 billion at the close of 2008, versus a deficit of only $16.579 billion at the end of 2007.
    Plans with Accumulated Benefit Obligation Less Than Market Value of Assets
    2/19 Subset of 12/31 Filers 2004 2005 2006 2007 2008
    Market Value of Pension Assets ($ billions) 91.161 90.370 70.813 55.228 191.303
    Accumulated Benefit Obligations ($ billions) 119.177 116.712 92.374 71.808 245.498
    Aggregate ABO Funded Status ($ billions) (28.016) (26.342) (21.561) (16.579) (54.196)
  • Pension Asset Return. For the 2/19 subset, the actual rate of return on pension assets during 2008 was -21.9%, significantly below the 10.5% rate of return experienced during 2007 and ending a five-year streak of excess gains.
  • Expected Rate of Return on Pension Assets. For the 2/19 subset, the asset-weighted expected rate of return on pension assets used to measure pension cost for 2008 was 8.2%, down slightly from the 8.3% 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
    2/19 Subset of 12/31 Filers 2004 2005 2006 2007 2008
    Expected Return on Assets ($ billions) 20.687 21.449 23.214 24.789 25.695
    Actual Return on Assets ($ billions) 28.527 29.105 36.695 33.080 (73.422)
    Expected Rate of Return 8.53% 8.46% 8.42% 8.32% 8.19%
    Actual Rate of Return 12.22% 11.23% 12.92% 10.48% -21.90%
  • Pension Asset Allocation. For the 2/19 subset, the asset-weighted allocation to equity investments dropped to 43.4% at the close of 2008, down from 55.6% at the close of 2007. In contrast, the allocation to bonds and other fixed investments rose to 41.0% from 32.0%. 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 2/19 subset, employer contributions (blue diamonds) to global pension plans remained nearly level at $7.656 billion during 2008, compared with $7.600 billion during 2007, 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 the alarmist warnings still being broadcast this year.
    Employer contributions to pension plans during 2007 and 2008 (and 2009) 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. Despite the drastic losses during 2008, many companies will be able to continue those contribution holidays for 2009.
  • Pension Cost. Since current accounting standards defer and smooth pension experience, for the 2/19 subset the net periodic pension cost (red squares in the graph provided under the employer contribution section) for 2008 was $3.673 billion, down significantly from the $6.576 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 2/19 subset the 2008 pension cost would have been $95.427 billion, versus a pension income (i.e., negative pension cost) of $16.999 billion for 2007.
  • Discount Rate Assumption. For the 2/19 subset, the obligation-weighted discount rate used to measure PBO as of the close of 2008 was 6.23%, up slightly from the 6.17% discount rate assumption at the close of 2007.
  • OPEB Funded Status. For the 2/19 subset, the funded status of other post-employment benefits (OPEBs, primarily retiree health insurance benefits) remained nearly level, actually improving by $0.215 billion during 2008. 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 2/19 subset, employer contributions to OPEBs increased slightly to $4.049 billion during 2008, up from $3.496 during 2007.
  • OPEB Cost. For the 2/19 subset, net periodic benefit cost for OPEBs decreased to $4.301 billion during 2008, down slightly from $4.450 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

19 February 2009 at 7:19 pm

Posted in άctuary