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Pension PBO Funded Ratio for Quarterly FY Groups

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PBO FR quarterly FY groups 2014

Most public U.S. corporations use a calendar fiscal year (FY), ending on or around December 31. But although distinctly in the minority, a material group use fiscal years ending in every other month of the year — on or around January 31, on or around the end of February, on or around the end of March, and so on. Since accounting for pension plans generally rely on spot measurements as of the close of a fiscal year, and since asset experience and discount rates and other measurement factors can be very volatile during the course of a year, appraisal of the full universe of pension plans must take account of the different fiscal years.

One very major, rather highly publicized annual pension study has been known to handle the fiscal year issue for companies with fiscal years ending in the first half of the calendar year by including the data of such companies for every prior fiscal year except the most recent year. That is, for displays like the 15-year graphs I typically provide here, for those first-half-FY employers that study would include only 14 years of data, simply ignoring the 15th year completely, quite obviously producing spurious results and faulty conclusions for their most recent year. Yet even a partner at a major actuarial consulting firm shrugged at the error with the comment, “Nobody really cares.” Apparently so, since that study continues to see wide press coverage despite the absence of credible methodology.

Another major published annual pension study aggregates all data for any fiscal year ending within a particular calendar year, without any adjustment to any numbers reported for earlier measurement dates. Although that approach avoids the gross error made by the first study, it suffers from the practical fact that pension experience for companies with fiscal years ending January 31 (as but the most obvious illustration) more closely reflect the previous year’s experience for pensions of companies with fiscal years ending December 31. If data is to be aggregated into 12-month universes without adjustment for fiscal year timing, then general experience suggests a lag of 3 to 4 months — that is, that results meant to represent the end of 2014, for instance, ought rely on fiscal years ending 4/1/2013 through 3/31/2014, with comparable shifts for previous years. Of course, the same problem could be raised with respect to any line drawn in such a manner; but typically, most of the aggregate numbers from such a lagged set would more closely approximate the true aggregate numbers as of December 31.

Some analysts have attempted to deal with the effect of measurement volatility by publishing monthly reports that purport to reflect the status of pension plans for any given month. All one need do is to contrast such monthly estimates with the real data eventually published in financial reports to realize that those reports rely on rather crude estimation techniques. For instance, one of those major monthly reports predicted rather absurd increases in employer contributions for a recent year, then routinely churned out monthly estimates purporting to represent an updated gauge of pension experience that not only ignored its own wild contribution projections but also ignored any employer contribution whatsoever. Generally those purported updated assessments look only to very general stock market experience, without taking into account the major share of pension data represented by foreign pension plans, without taking into account asset allocation of various pension plans, without taking into account announced actions by employers that will have major effects on the data, et cetera. Last but not at all least, such monthly assessments generally apply the same update methods to their most recent month’s estimate, without updating for any more recent actual data that is available, building new errors on previous errors’ foundation.

The chart of PBO funded ratios I’ve given here provides but a first step toward working to properly aggregate and analyze data representing different fiscal year periods. Here I still do aggregate employers with different fiscal years, but only into quarterly groups rather than across a full 12-month period. The blue line with circles represent pension plans of employers with fiscal years ending in January, February or March. The green line with triangles represents pension plans of employers with fiscal years ending in April, May and June. The orange line with diamonds represents pension plans of employers with fiscal years ending in July, August and September. And finally, the red line with squares represents pension plans of employers with fiscal years ending in October, November and December.

More on this as I come back to edit this post with further commentary, analysis and conclusions, as well as to update it for additional data as I continue to collect newly published financial statements.

(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

14 February 2015 at 5:28 pm

Posted in άctuary

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