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Pensions — Discount Rate v Expected Return

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Pension Plans - Discount Rate v Expected Return - 2010-2014 Q4 (200)For the close of 2014, the discount rate used to measure obligations under defined benefit pension plans dropped back to 2012 levels, after increasing for 2013. The lower red line of this chart shows average discount rates used at the close of fiscal years ending in 2000 through 2014 for the pension plans of 200 U.S. corporations with fiscal years ending in the 4th quarter of the calendar year. That drop in the discount rate for 2014 is the most significant factor in the drop in the aggregate funded ratio of pension plans, as discussed in 2014 Pension PBO Funded Ratio, since the actuarial losses arising from remeasurement of pension obligations with the lower discount rates more than offset gains experienced by the pension assets. As discussed in Pension Cost — All v Traditional, the drop in discount rates is also the principal factor in the increase for 2014 in the aggregate pension costs, since the actuarial losses arising from obligation remeasurement for the small subset of employers now choosing immediate recognition of gains and losses more than offsets the decrease in pension cost that most companies were reporting for 2014.

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Written by macheide

20 March 2015 at 11:12 am

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Pension Cost — All v Traditional

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Net Periodic Pension Cost - All Companies vs Traditional Spreading - 2014 all (205)As noted in an earlier post in which employer contributions to pension plans were compared with pension costs, the trends for net periodic pension costs have been confused the past 4 years by a small subset of companies that have chosen to switch to immediate recognition of gains and losses. Previously, that subset of companies followed the traditional accounting still in use by the majority of companies, involving a deferral-disregard-spread approach to gains and losses: (1) gains and losses, including changes in measurement of obligations due to changes in interest rates, are not recognized until after the year in which the gains or losses actually arise, at the earliest; (2) cumulative gains or losses up to 10% of the greater of the value of pension assets or pension obligations are disregarded; and (3) gains or losses outside that 10% corridor are spread over the future service life of active employees (i.e., generally about 15 years).

In very sharp contrast, the small subset of companies that are departing from the traditional approach recognize pension gains or losses in full in the fiscal year in which those gains or losses arise. The influence of this small subset on aggregate global trends is obvious in this graph. The blue curve with open circles represents the aggregate global pension cost for 205 of the largest U.S. companies that sponsor defined benefit pension plans for fiscal years 2000 through 2014, showing an increase in pension cost for 2014 relative to 2013 cost. This is similar to the chart that will be published by most if not all of the major pension studies; and more likely than not, none of those published studies will point out what has been the source of most of the volatility in pension cost the past 4 years.

Of those 205 companies, the red curve with closed circles shows the aggregate global net periodic pension cost for the 196 companies that continue to use the traditional deferral-disregard-spread approach. If all companies had continued to use that traditional approach, pension costs would have declined in 2014 relative to 2013 costs, as seen by the trend for those 196 companies.

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Written by macheide

17 March 2015 at 2:46 pm

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OPEB Obligation Abatement

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OPEB Obligation as percentage of PBO - 2014 all (205)During 2014, obligations for other post-employment benefits (OPEB) provided by U.S. corporations continued to decline relative to projected benefit obligations (PBO) for defined benefit pension plans. Pension PBO itself is a moving target — although remeasurement at lower interest rates at the end of 2014 led to sharp increases in PBO, the aggregate global PBO continues to fade due to accrual freezes implemented by many pension plans. Even so, curtailment of retiree health benefits and other retiree benefits has been more sweeping than the pension freezes, cutting aggregate global OPEB liabilities to less than half the level measured a decade ago.

This chart shows aggregate global results for OPEB expressed as a percentage of PBO for 205 U.S. companies for fiscal years ending in 2000 through 2014. Don’t expect the current trend to ever reverse: eventually non-pension retiree obligations shouldered by employers will dwindle to little or nothing, leaving those responsibilities entirely to Medicare and the individual.

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Written by macheide

11 March 2015 at 5:04 pm

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2014 Pension Asset Return — Expected v Actual

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Pension Asset Return - Expected v Actual - 2014 all (205)During 2014, investment returns on assets of defined benefit pension plans exceeded the expected asset returns for the 3rd consecutive year. Pension asset returns have been positive for the past 6 years since the huge losses of 2008.

This chart shows aggregate global results for the pension plans of 205 U.S. companies for fiscal years ending in 2000 through 2014. Solid blue circles indicate expected asset returns included as a component of net periodic pension cost. Open red squares indicate actual investment results.

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Written by macheide

5 March 2015 at 6:45 am

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Pensions & Other Post-Employment Benefits 2014

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10-k Annual Reports for Corporate Fiscal Years Ending through 1/31/2015
(with January fiscal years treated as corresponding to preceding calendar year)
– number examined as of 4/1/2015 — 275 –

Charts and Commentary —

(* — pending update, previous data set as of 2/28/2015 being used)

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Written by macheide

1 March 2015 at 1:31 pm

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What’s Wrong with This Picture?

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Written by macheide

22 February 2015 at 9:27 am

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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.

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Written by macheide

14 February 2015 at 5:28 pm

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Pensions PAYG Benchmark

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Pension Benefits v Contributions 2014 nov-dec (54)Very early on the education of a pension actuarial student encounters the pay-as-you-go (PAYG) “funding” method, under which contributions simply equal benefits. Except for the occasional reference to our Social Security system, which is basically run on a PAYG basis, the student then leaves the method behind for the majority of practice. Except for nonqualified deferred compensation plans for executives, numbers for which are a material piece of the pension numbers reported on corporate financial results — since those plans are unfunded, their contributions are made on a PAYG basis. In fact, during periods when companies have been on a “contribution holiday” for their qualified pension plans due to previous advance contributions (e.g., as was recently the case for GM), their domestic pension contributions are comprised entirely of PAYG amounts paid to their nonqualified deferred comp programs. Aside from those actual PAYG amounts, the PAYG basis offers a useful benchmark for assessment of total contributions made to all pension plans sponsored by an employer.

This chart shows results for 54 public U.S. employer with 2014 fiscal years ending in the 4th quarter of 2014 that have released their 2014 annual financial statements by 13 February 2015. For those companies, the chart shows aggregate pension benefits paid (smooth higher orange line) and aggregate employer contributions to pension plans (volatile lower blue line) for fiscal years 2000 through 2014.

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Written by macheide

14 February 2015 at 4:26 am

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Pension Volatility — Employer Contribution vs Investment Returns

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Pension Employer Contribution vs Asset Return 2014 dec (50)Employer contributions to pension plans, as illustrated and discussed in my previous post, might seem more volatile than corporate finance officers, investors and creditors and other interested parties (such as the pension plan participants) might like to see. Imagine, for instance, if the employer’s “contributions” to direct compensation paid for salaries were as volatile. But compared to pension asset returns, another key factor in the costs of pension plans, employer contributions appear relatively stable.

For 50 U.S. public corporations with calendar fiscal years, this chart shows employer contributions to single-employer defined benefit pension plans (orange smooth line) contrasted with investment returns on the pension plans’ assets (blue volatile line) for 2000 through 2014.

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Written by macheide

13 February 2015 at 6:18 pm

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2014 Pensions — Employer Contribution

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2014 Pensions - Employer Contribution all (205)For 205 public U.S. corporations, this chart shows the aggregate global employer contributions to single-employer defined benefit pension plans for fiscal years 2000 through 2014. As I’d anticipated last year, the amount continued to decline . . . and the main reason for that decline had absolutely nothing to do with pension funding relief legislation.

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Written by macheide

12 February 2015 at 11:33 pm

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2014 Pension Asset Return

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FR PBO 2014 all fy+1 (275)Investment returns for assets of defined benefit pension plans sponsored by public U.S. corporations generally remained at the healthy levels experienced for 2012 and 2013. This chart shows the aggregate global investment returns during fiscal years ending in 2000 through 2014 for the assets of pension plans maintained by 275 companies (including companies with calendar fiscal years as well as non-calendar fiscal years; and with a fiscal year shift of 1 month, i.e., results for companies with fiscal years ending in January are shifted back to the preceding calendar year). The solid horizontal line in the chart represents zero: years during which investment returns slipped below that line represent years when assets lost value.

Future posts will estimate the annual rates of return based on these investment results, together with estimated cumulative rates of return over multiple years, then will compare those rates of return with investment return assumptions used to determine pension plan costs.

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Written by macheide

11 February 2015 at 9:42 pm

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2014 Pension PBO Funded Ratio

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Pension PBO FR 2014 all fy+1 (275)As I’ve been separately exploring in a post looking at plan assets and projected benefit obligations for defined benefit pension plans sponsored by public U.S. corporations, during 2014 the increase in obligations due to lower interest rates outpaced investment gains in assets. The result: a drop in the aggregate pension plan funded ratio, reversing roughly two thirds of the increase in pension funded ratio experienced during 2013.

This chart shows the aggregate global pension plan funded ratio determined on the basis of projected benefit obligations for 1995 through 2014 for 275 companies, including employers with calendar fiscal years as well as non-calendar fiscal years. The data set for this chart uses a fiscal year shift of one month: companies with a fiscal year ending in January are treated as if in the preceding calendar year.

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Written by macheide

9 February 2015 at 8:20 pm

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2014 Pension MVA & PBO

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Pension MVA & PBO 2014 (275 FY+1)For 275 U.S. corporate sponsors of defined benefit pension plans, this graph shows aggregate global numbers for market value of pension assets (blue diamonds) and projected benefit obligations (red squares) for fiscal years ending in 2000 through fiscal years ending in 2014 (treating fiscal years ending during January as having been for the preceding calendar year). As expected, this chart shows trends that are quite similar to those that had been seen on the original charts shown in this post for 6 companies, for 16 companies, and for for 205 companies: asset increases for 2014 on pace with the gains of 2013, but with even greater increases in projected benefit obligations due primarily to significant declines in discount rates.

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Written by macheide

7 February 2015 at 12:05 pm

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My Last Picture Show

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I may have already attended my last Enrolled Actuaries Meeting, last year. After 26 consecutive annual conferences, I may be done.

Things have moved on. I doubt I’ll be missed. Nobody will remember what I did to things. Oh well. It was fun while it lasted.

I think my favorite moment was when I created a visual representation of the general nondiscrimination test completely on the fly, off the cuff, just spare change and pieces of paper on a blank overhead projecter.

And there was the memory that wasn’t: the year I could have “owned” a speaker’s seat for all seven breakout sessions, a record that never would have been bested.

And the year the hotel gave me a luxury suite because my room reservation had been screwed up.

Thousands of other memories over a quarter of a century at the pulse of the profession, now more than likely behind me. I doubt I’ll miss it. Oh well. Send no flowers.

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Written by macheide

28 March 2012 at 5:40 am

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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

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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

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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% . . . .

Milliman

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