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Archive for March 2009

Pension’s Target Equity Allocations Shifted Down

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While stated equity targets have not declined significantly, actual equity allocations at year end were much lower. For the 83 companies that provided data, the average target equity allocation is 55 percent for 2009, compared with 58 percent for 2008. However, actual equity allocations fell over the year, to 48 percent at the end of 2008 from 59 percent the year before.

Watson Wyatt Worldwide

So although the 2008 market meltdown brought actual equity allocation in pension funds down below 50%, employers have not materially altered the target equity allocations under their pension plans’ investment policies?

If that were true, it would not be a trivial observation. Not very trivial at all. For decades, the typical pension fund held its equity allocation target steady near something like 65%, through bear and bull. Which then automatically drove an ongoing buy-low-sell-high strategy: if a bull market drove the equity allocation toward 70%, then the fund would sell stocks (at relatively high prices) to bring the equity allocation back down toward the target; conversely, if a bear market drove the equity allocation down toward 60%, then the fund would buy stocks (at relatively low prices) to bring the equity allocation back up toward the target. So if pension funds were truly holding their targets in place in the face of the meltdown, then we could expect to see some rather heavy duty cash moving into the market. Which was largely behind my bloody spring followthrough hopes, thinking that maybe just maybe I might consider heading back into the market myself as early as Memorial Day, to join the parade of all that new money coming in, instead of waiting until late 2009 or early 2010.

Except, Wyatt is wrong. And not just on the numbers, but on exactly what those numbers mean regarding the commitment of pension funds to their stocks.

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Written by macheide

26 March 2009 at 4:55 pm

Posted in άctuary

Bloody Spring

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I know I’m a bit of a crank to leverage pension policies so heavily into my own personal investment outlook and strategy. Even so, that’s never failed me, not once. I pulled out of the market completely just before Black Monday 1987 and stood back that very morning laughing about what was about to happen, simply because I didn’t want to be buying across the aisle from what then was one of the largest pension fund sales in history. And the few individual stock purchases I’ve made during my life all made very heavy earnings from short-term knowledge of the pension plans of the companies (none of them clients, of course – I do steer very clear of using any insider information for my personal investing). I can’t even begin to count all the times I’ve watched new cash head to the market from pension plans anxious about accounting rules, riding the buying up in my own 401(k) equity investments. Then this past year, I had no interest in being among those having to balance out all the selling that pension investment reallocation strategies had been necessitating, so I’ve been happy to have not lost a dime in the market during its recent meltdown.

So let’s point out yet another potential pension influence: those 2009 pension cost figures about to be revealed in the first quarter financial statements about to be issued by companies with calendar fiscal years. One speculation pegs the increased pension cost at a level that would pretty much wipe out 2009 earnings for pension sponsors (those that don’t sponsor pensions being untouched by the higher pension costs, of course, so only suffering earnings erosion from the general economic malaise). My own personal estimate looks for a pension cost increase of only half that speculation, but even that more favorable expectation would hit corporate earnings like a sucker punch . . . . delivered by a wrecking ball!!

And much the same way as earnings estimates in early 2007 and early 2008 failed to anticipate pension cost decreases those two years, so too even the most dire earnings estimates making the rounds on the street these days have not yet taken those significantly higher pension costs into account.

Aside from several obscure pension forecasters whose word has not yet been recognized, so far the only indication of this wrecking ball has come in the form of some early warnings from du Pont and one or two other companies, but with none of those early warnings having yet put the dent that will have to be made in earnings projections. By the end of April, the naked truth will be hitting hard. And I believe we’ll see blood flowing through the ditches. And be hitting that basement floor like we were thrown down at it.

But even if many of the pension plans that have survived this ugly decade close their doors or freeze their benefits, the market meltdown of the past two quarters has hit an important wall: either more pension funds follow the lead of GM and others into permanent reallocation; or else pension plans take a temporary reprieve from their investment policies (not unlike how the stock markets have granted grace periods on otherwise applicable delisting requirements) . . . or we’re about to see an acceleration of the leveling out and turnaround in pension fund equity investment that I had originally anticipated coming in the final quarter of 2009 or early 2010.

In English? Like I predicted verbally three weeks ago and reiterated in writing earlier this week, I see the current “rally” as only a temporary bounce. So then when I refer to blood in the ditches and being thrown at the basement floor, I believe we still have a real chance of seeing the Dow cross below 6k before Memorial Day. But whereas earlier this year I anticipated steering clear of equity investment until late 2009, if not until 2010, I might now be making my turn as early as Memorial Day. Especially if the bottom has dropped out between now and then. And although I do look beyond pension policy – to the global economy and to technical factors and to a host of other influences – like so many times before, pensions will play a major role in my decision if I do move then: the worst of the info on pension cost increases will have been fully factored in by then; but we might then be seeing some serious money come to the demand side of the markets in the form of pension investment rebalancing back up to some higher equity mix. Meaning we might then see the market leap off a bloody spring and head straight up.

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Written by macheide

25 March 2009 at 3:15 pm

Posted in calls & puts

Coincidence? Doubtful

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Watson Wyatt Worldwide, a consulting firm, estimated pension assets declined 26 percent in 2008. The firm also reported the 100 largest US pensions were just 79 percent funded in 2008, compared with 109 percent funded at the end of 2007.

Boston Globe

For the group [of 100 companies with largest pension plans], funded status decreased to an average of 79% from the prior year’s 105.2% . . . .


Just a coincidence, that a newspaper carries a story citing Wyatt for a figure based on the “100 largest US pensions” the day after Milliman produces a full report on what seems to be the same set?

I don’t believe in that kind of coincidence.

For the past 9 years, Milliman has produced the best annual report of pension funded status – by far the earliest (usually at least two months before the next competitor in line, and typically about six months before most others), by far the most complete (covering every main element including cost and contributions, measurement assumptions, asset allocation, and even OPEB funding, whereas many of the competitors venture little beyond reporting on pension funded status), the most accurate (definitely more credible than what sometimes seems the most cited competitor’s report, one from a credit rating agency, a report typically containing crucial data and analysis errors in as many as a third of the study’s companies’ numbers), and by far the one with the best insights (several of the competitors’ studies suitably illustrating the value of actuarial advice via the weakness of their analysis). At best, competitors have only found room to chase Milliman in the selection of the study’s members – Milliman increased its study size, from 25 the first year and 50 the second year, to settle on 100 companies for all remaining studies; competitors pretend to have more complete data by reaching for the S&P 500 or the Fortune 1000, or even sometimes pretending to show results for the S&P Composite 1500. But just as the Dow Jones Industrial 30 can serve as proxy for the S&P 500, or as one need not know where the Russell 5000 might be valued if one has the S&P 500 in hand, so too the Milliman 100 has slowly but surely become an acceptable standard that adequately reflects broad trends that are only echoed when results for the “broader” sets are eventually published.

So then, has Wyatt finally realized that stretching to the Fortune 1000 or faking the S&P Composite 1500 wastes precious resources without adding sufficient insight to their investigations? Even if that is so, why not then come out with their 100 last week or several weeks ago, when I myself had already started poking similar numbers out into this blog? Or why not next week, when the Enrolled Actuaries Meeting could have given them a springboard for further discussion? Why the very morning after the Milliman report? Again, I really don’t believe in such coincidence.

But I must say, that “109 percent” cited in the Globe article is either a misprint (did the fax blur Milliman’s 105 into a 109?) or an outright blooper. I hereby give myself this exercise, but from extensive experience in the numbers I suspect it to be a failed exercise: find any 100 companies of any size from any set that would average a 2007 funded ratio as high as 109. For smaller sets of a few dozen companies at most, sure, throw in the very small handful that are over 109, and you can pull that average; but not for 100 companies. Heck, even for 2007, when funded ratios reached the highest peak for the millennium, only 123 companies among the S&P 500 had assets in excess of liabilities; and by far, most of those companies were funded closer to 100 than as high as 109. Not that anyone much cares: bad pension numbers like the Globe’s 109 get passed along all the time, are left uncorrected, and pretty much pass into practice as if they are truth, without so much as a shrug, just because it has been supposedly credited to an “expert.”

Whatever. OK, so the Boston Globe ain’t the Financial Times or the Wall Street Journal or Pensions & Investment Age or Bloomberg or any source that many business people might go for their pension information, so does it much matter that this blurb credited to Wyatt should have given the nod to Milliman? In the greater scheme of things, probably not. It’s still irksome.

(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

25 March 2009 at 8:43 am

Posted in άctuary

preparing long defense

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impromptu baseball, two per side, set up in a steeply slanted room at th western edge, with a chute set up leading down to a hole torn out for th ball to be pitched through. a dog stepping up to help th other team pitch. my side did get one out, and my first hit was only a single instead of th homers my partner was swinging, but it started to appear we might continue to bat our side all night. i felt somewhat frustrated at having to use a pencil for a bat, switched to using a comb – shorter, but more face to th ball

looking up before one of my at-bats, in a clear blue sky i saw a very strangely designed cloud. looked around for my camera, before realizing that all th busy scurrying of everyone else indicated that th pattern was not a cloud, but rather a message to us posted in th sky by aliens, an ultimatum and a warning. left our baseball game to proxy players to finish off, driving away in a bus i looked back to what turned out to have been a coal pit where we had been playing, thoughts of our play leaving fresh artifacts for later generations to find in th pit

heading down to th lower level to seek my things for departure, but all th power had been turned off with th emergency at hand, so it was completely dark. feeling around in one of th lockers, i could find only a few clothes and books of others in our party, nothing of mine. went around through th hallways toward my room hoping to get enough things there to carry me through. came across another group that was separately meeting in th hotel. one of their name tags had fallen from th bulletin board where they were setting up, i picked it up for them, many other name tags appeared dropped on th floor

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Written by macheide

25 March 2009 at 4:04 am

Posted in oneirra

Pension Funding Domestic v Foreign

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domfor2008As we always point out, and as is at least footnoted in the better among the published reports, pension numbers reported in corporate financial statements of publicly traded U.S. companies include both domestic and foreign pension plans. And as we’ve always observed, but is inadequately examined by any of the published reports, foreign pension plans are typically significantly less well funded than are domestic pension plans (even when unfunded supplemental executive retirement programs are included with the domestic numbers).

One important trend which so far has been overlooked by published reports and the business press: although foreign pension plans shared the hangover from the 2008 market meltdown, relatively they lost less in funded status than did domestic pension plans. Credit four primary reasons:

  • Underfunding Shifted Emphasis to Liability Changes – Although not universally constant across the board, companies generally increased discount rates used to measure pension obligations, reflecting higher interest rates in corporate bond markets. Higher discount rates tempered pension liability growth or even led to declines in pension liability. For all pension plans, the effect of those pension liability changes tended to move counter to losses suffered by pension assets. But since foreign pension plans tend to hold less assets, the pension liability changes were more pronounced for 2008. Particularly representative of this effect were pension plans for subsidiaries in Germany, where pension plans are completely unfunded in the traditional U.S. sense – there, only the effect of liability changes prevail.
  • Lower Equity Investment for Funded Plans – Particularly for pension plans in subsidiaries in England, but elsewhere as well, foreign pension plans that are backed by pension assets overall have lower equity investment allocations than remains present for U.S. pension funds. So although foreign equity markets overall dropped more during 2008 than did U.S. equity markets, foreign pension funds generally saw lower investment losses than did their U.S. counterparts.
  • Dollar Muscle – Thank the strength of the U.S. dollar against other currencies for a healthy share of the relatively lower loss of funded status experienced by foreign pension plans during 2008. All things considered, a strong U.S. dollar helps the funded status of underfunded foreign pension plans that are then converted back into dollars for U.S. reporting. (I’ll come back to this with more detail in a future post.)
  • Persistent Employer Contributions – This isn’t a distinction for each and every company, but it remains so for enough of the elephants in the bath to be worth note. For some companies, whereas employer contributions for qualified pension plans for U.S. employees remain low or zero due to credit balances accumulated several years ago (then largely in response to an accounting rule that has since been eliminated), employer contributions for foreign pension plans generally increased during 2008. So relatively speaking, asset losses were offset by employer contributions more so for foreign pension plans than for domestic pension plans.

The result: As seen on this post’s chart of the past 10 years for S&P 500 companies that separately disclosed their domestic versus foreign pension plans, here showing pension funded ratios for domestic pension plans (higher blue circles) versus pension funded ratios for foreign pension plans (lower purple squares), the funded status for domestic pension plans remained above that of the foreign pension plans. However, as also is readily apparent from this chart, foreign pension plans did not suffer as badly during 2008 as did domestic pension plans, with the spread between the domestic pension funded ratio versus the foreign pension funded ratio squeezing down to a margin smaller than any experienced through the past decade.

But don’t expect the two lines on this chart to cross. Even if all four trends were to persist through 2009 – an unlikely scenario – at most we would see the spread narrow further, without merging or flipping.

(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

24 March 2009 at 4:16 pm

Posted in άctuary

As Expected

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Patterns shown by certain charts demonstrate once again that one need not collect all the stars in the galaxy to get a pretty good idea what the night sky looks like. As expected. In this case, meaning representational. Characteristic. Sufficiently typical. At least one of us will still find solitude in exploring stretches others never get around to visiting, but even the outliers we find won’t rewrite any books.

That doesn’t mean I have a clue where that $70 billion number for an increase is coming from. I still think somebody’s smoking something left over from the 60s. Does it not bother anybody that that’s completely off the current chart? And what became of smoothing, corridors, and expected service? Or are we phasing in phase 2 already? So let’s see now, what them quarterlies are leaking out to us. As expected. In this case, meaning that what some have called expected is not necessarily remotely realistic. Watch for something no higher than $40 billion increase for the galaxy, with maybe $30-35 billion for the constellation – still enough of a leap to give pause to any premature market recovery, since earnings forecasts have not yet factored these numbers in, but no more than half the $70 speculation. At least one of us is not all that surprised, although don’t hold your breath waiting for a corrected number to sneak into the final report.

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Written by macheide

24 March 2009 at 6:41 am

Posted in bedhead

Tagged with

Just a Bounce

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That dead cat’s even jumped a little, yes. But without much more than hedge fund money buying into it, it’s still nothing more than a bounce.

Yes, I came very very close to sending 10% across to equities two weeks ago. But I’m not into making 3-week moves. And another week is all I give this, even with today’s latest edition of rules from Treasury.

Today’s 497-point hop in the Dow wins Kelly a steak dinner, but I don’t expect Nat will have to wait more than another two weeks to pick up her Olive Garden outing from a comparable drop. Burn out the little bit of outside money that might be foolish enough to venture back in, and we’ll be back to the basement.

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Written by macheide

23 March 2009 at 6:09 pm

Posted in calls & puts