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Archive for March 24th, 2009

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

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