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Archive for April 2009

8-Fold Pension Cost Hike . . . Not!

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[T]he loss in [pension] funded status in 2008 is projected to produce an increase in pension expense for 2009 (and a charge to corporate earnings) in excess of $70 billion [i.e., about 8 times the 2008 pension cost of $10.4 billion].

Milliman 2009 Pension Funding Study

As early as last November, even before we knew where the dust of 2008’s maelstrom would settle, I was anticipating aggregate 2009 costs for global pension plans of the S&P 500 to be in the neighborhood of triple 2008 pension costs, at most. That estimate came from: an expectation that even continued wild volatility in equity markets and interest rates would be within certain ranges; an understanding of how current accounting under SFAS 87 works; and an awareness – so far, as best as I can tell, a unique awareness not possessed by any other observer – of how high pension cost would be if the deferral-and-spreading methodologies of SFAS 87 were not in place (e.g., as discussed in one of several instances in Not Your Daddy’s Pension Cost). Leading me to find guesses such as Milliman’s expectation of an 8-fold cost (actually, one of the more conservative of speculations, most other published projections being even wilder) to be somewhat absurd, to characterize it euphemistically.

As material as elimination of SFAS 87’s methodologies would be, the effect on 2008’s pension cost of such a drastic change in GAAP would have barely been the same quantum level as those wild guesses were bestowing on costs under existing GAAP. So with many companies using smoothed asset values, with even the investment losses from those smoothed values only facing recognition outside a corridor, with even those amounts spread over expected service lives of employees, and with everything else SFAS 87 offers for minimizing cost volatility (e.g., few if any companies reducing expected rates of return on assets, contrary to another speculation given in the Milliman report, unsubstantiated by the 2009 rates already given in many companies’ 2008 annual reports), it’s difficult to see how 2009 pension cost would be within the same galaxy as was being speculated.

And with today’s publication of IBM’s interim fiscal report for the first quarter of 2009 (along with similar interim reports previously published by other companies), we now have enough hard data to act like an election-night TV analyst who can declare the winner even before the final votes have hit the bottom of the ballot box. In the aggregate, for any broad group of companies, pension cost for 2009 will be about 2-3 times pension cost of 2008. A significant jump, to be sure, but nowhere near the 8-fold level. Indeed, about the only individual companies that might see an 8-fold cost level or higher are those that had a 2008 pension cost near zero, from which point just about any change at all – whether increase or decrease – appears artificially high.

And here, the difference between a 3-fold cost level versus an 8-fold cost level is not a matter of actuarial assumptions or expected future economic conditions or any such opinion-based distinction. It’s merely a matter of correct application of SFAS 87 technique versus inappropriate approximations. Or perhaps even worse: delegation of the task for developing the number to lower-level staff who do not understand how SFAS 87 works, without an expert’s follow-up to check the results.

Whatever. This is where Milliman gets to be like S&P and so many others, who have published bad pension reports with faulty results based on weak methodology and incorrect data, but then have never gone back to correct their mistakes, indeed in some instances have perpetuated the blunders year after year after year. Thing is, although the $70 billion increase speculation may have turned a head or two when the Milliman report was published last month, by now nobody remembers or cares. And since to the best of my knowledge, I remain the only one who bothers to look at first-quarter financial statements, Milliman’s mistake will be completely overlooked by next spring, when most of 2009’s annual financial reports confirm what I’m stating here, that Milliman’s 8-fold level is significantly overstated.

And still, it wasn’t just a bad estimate. It was simply wrong.

(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

28 April 2009 at 1:31 pm

Posted in άctuary

on resignation

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i already had several cases on my desk. more came to me in three separate packages all delivered at th same time, two boxes and one business envelope. th case in th business envelope was marked urgent, and i quickly realized i could deal with it quickly and have it out th same day it had arrived, so began writing out th one-page memo it required

i had but two sentences left to my memorandum when i was interrupted by a junior actuarial colleague, who rested several of his own cases on my desk while asking me a question. i was unhappy at th interruption and even unhappier at his cases covering up and confusing th carefully organized piles of my own work. a lower level staffer joined us added her single folder to th piles on my desk, open to where she had been making notes on interactions between th different workers on th floor

after i finally convinced th two to leave me to my work, i discovered that one of my files was missing: th case i’d been working on. i immediately protested. it was clear that th file taken away by th staffer was th employee interaction appraisals she’d been taking. it was quite unclear what was included in th stack taken away by th junior actuarial colleague; but although he denied taking my file, he refused to reveal what he had with him. i carefully went through th files remaining on my desk several times, to no avail

finally frustrated, i stood up from my desk and stomped off, declaring “i quit”

on th bus, carolyn sat down beside me and tried to calm me down, pointing out that when cases sometimes were destroyed by fire or other calamity, a duplicate was always available, so my casefile could be replaced. i responded that she was missing th point, that th only reason i was still working at all was for th kids, that it was time for them to make it on their own. i told her i would inform david myself in th morning, and that larry could handle my sole remaining major case, but that my decision was irreversible

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Written by macheide

22 April 2009 at 4:04 am

Posted in oneirra

Just Repair, Not Replacement

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Back on Friday, March 6, with the Dow closing at the subterranean 6,626.94, I struggled over the temptation to move some funds over to equities. But by Saturday morning had decided against it, solely to keep the discipline of maintaining at least a 6-month investment horizon. I verbally warned against feeling like we might have missed a great opportunity since although I pointed to 7500-8000 as my expectation for near-term direction to the Dow, I gave it at most 3 weeks of steam. And although that measure of gain would be nice to have for a 3-week investment, I didn’t care to indulge in the sleepless nights that would come from edging toward being a day trader.

As the market bubbled up through March, I reiterated my belief that we were only seeing a temporary bounce, sharpening my feelings that we might be in for a bloody spring as we wade into the thick of the first quarter’s earning reports. And held onto my belief of 8000 as the current ceiling for the Dow.

And then held to that belief of an 8000 ceiling even as we punched a few holes through it, very similar to the brief taps made in the 13000 ceiling I set last year this time. Just a few small holes in the ceiling, that’s all: repair only, not replacement with any higher ceiling. We’re still not scraping together enough sustained buying power (read: pensions and other long-term institutional investors) to hold and extend it further upward. From here, up remains a hard fight, while down will increasingly look too easy.

I do like some of the longer term signs I’ve been seeing, though. So take it back on down to the basement, and – as noted in my previous post in this category – I might be interested in re-entry into equities as early as Memorial Day. But will be quite content to remain on the sidelines through then.

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Written by macheide

20 April 2009 at 3:27 pm

Posted in calls & puts