aftermath

we dream, we create, we change, we love

Archive for the ‘άctuary’ Category

Pension Funding Domestic v Foreign

leave a comment »

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.)

actuary cat feed subscribe to aftermath’s άctuary category

bumper sticker [www.internetbumperstickers.com] - actuary

Written by macheide

24 March 2009 at 4:16 pm

Posted in άctuary

Elephants’ Pensions Fatter II

leave a comment »

frranked2008As I observed in yesterday’s aftermath post, the pension plans of the largest corporations with the largest pension funds are generally better funded than pension plans of smaller corporations with smaller pension plans. Whereas yesterday’s post illustrated that trend by grouping large companies versus smaller companies and charting them against aggregate assets, today’s chart looks at the funded ratio of the global pension plans of each and every S&P 500 pension sponsor, then simply plots those against the rank of the company in terms of pension assets as of the close of the 2008 fiscal year, from the largest pension sponsors at the far left of this chart to the smallest at the far right.

Were we expecting to see a more obvious decline, left to right? That’s not there, per se. But closer inspection of this chart does show the same trend as yesterday’s chart.

Let’s start by observing one somewhat remarkable thing that shows through on this chart – how very many of the companies have pension plans with a funded ratio between 70% and 75%, through the middle of the yellow zone on this chart. From nearly the largest through the smallest, the large number of companies at that level almost draw their own line across the chart, without necessitating having me do so. See that line, and the trend discussed in yesterday’s post emerges via the divergences from that line.

First, with the exception of Exxon and Caterpillar – the two “elephants” actually below the yellow zone – that yellow zone is empty at the far left edge of the chart, within the region enclosed by a red rectangle. And the thing is, since the companies within that red rectangle in the aggregate hold well over half of the pension assets for the entire S&P 500, those elephants drive the calculation of the aggregate funded ratio for the entire universe, since the aggregate funded ratio is essentially a weighted average, as if the entire universe of companies pooled everything into one gigantic single pension fund. That’s where yesterday’s graph – charted on the basis of aggregate assets – versus today’s – charted on simple ranking – better illustrates how the size of the pension fund, together with the higher funded ratios typical among the elephants, drives most of the results we were seeing yesterday.

But it’s not just the weight the elephants are throwing around. Look at the green band of the chart, left to right – the number of companies in that band tends to decrease as we reach the right side, the companies with smaller pension plans. In other words, even when we’ve left the elephants behind, we’re still seeing results that exhibit the trend we presented yesterday: lower funded ratios for the smaller pension plans.

And I’m still aiming toward getting around to an examination of why we’re seeing these results. Later.

(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.)

actuary cat feed subscribe to aftermath’s άctuary category

bumper sticker [www.internetbumperstickers.com] - actuary

Written by macheide

20 March 2009 at 9:54 am

Posted in άctuary

Elephants’ Pensions Fatter

leave a comment »

frsized2008The pension plans of the largest corporations with the largest pension funds are generally better funded than pension plans of smaller corporations with smaller pension plans. As illustrated by this chart of funded ratios for the S&P 500 as of the close of fiscal years ending in 2008.

The 22 elephants with pension assets in excess of $10 billion per corporation stake out the leftmost green square, comprising more than half of the S&P 500’s pension assets, measured along the chart’s x axis. In the aggregate, the funded ratio of global pension plans for those elephants was 81.2% at the end of 2008, above the overall S&P 500’s aggregate pension ratio of 79.1%, indicated on this chart by the higher heavy dotted line.

Almost three times as many beasts staked out the blue region, indicating corporations with pension assets between $3 billion and $10 billion per corporation. For those companies, the aggregate funded ratio of global pension plans was 79.2%, almost exactly equal to the S&P 500’s overall pension funded ratio.

The purple region then indicates the 87 corporations with pension funds of $1-3 billion each, with an aggregate funded ratio of 76.0%. The brown region indicates 53 companies with pension funds of $0.5-1 billion each, with an aggregate funded ratio of 68.9%. And the red region indicates 111 companies with pension funds less than $0.5 billion, with an aggregate funded ratio of 67.2%.

Several off-the-cuff observations –

  • Research Universe Will Affect the Results . . . Slightly. Various studies of these results are typically published by actuarial consulting firms, banks and rating agencies, and others. Each of those outfits typically uses a different research universe for its study – one firm using only the 100 largest pension sponsors; several using the S&P 500; and at least one purporting to use the S&P Composite 1500. As this chart indicates, research based on the 100 largest “elephants” can be expected to report higher pension funded status figures than the reports that use the S&P 500 set, i.e., several ticks above the 79.1% aggregate funded ratio indicated by the heavy dotted line. Even so, while stretching out to the S&P Composite 1500 or beyond will drag the pension funded ratio lower than the S&P 500 results, the pension funds for the additional companies are so small that the effect is diminished relative to the overall aggregate, yielding a funded ratio for the larger set that should be only slightly below the 79.1% S&P 500 level.
  • Median Results Mean Something! For the full S&P 500, in contrast to the aggregate funded ratio of 79.1%, the median funded ratio corporation by corporation was 72.3%, indicated on this chart by the lower, lighter dotted line. While the 79.1% number tends to get most of the press, that number essentially acts as though the companies with well funded plans could easily and would willingly share their pension surpluses (or lesser deficits) with the companies that have less well-funded plans. Which of course is not the case. Note that here, the research universe can make a huge difference: the median pension funded ratio for the top 100 pension sponsors is around 80%, essentially ignoring that well over a third of the S&P 500 plan sponsors have pension funds that may be facing legal restrictions and significantly higher pension costs and contributions due to severe underfunding.

And why are the elephants’ pension funds fatter than those of the smaller beasts? I’ll get around to that interesting “why” in a subsequent post.

(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.)

actuary cat feed subscribe to aftermath’s άctuary category

bumper sticker [www.internetbumperstickers.com] - actuary

Written by macheide

19 March 2009 at 5:20 pm

Posted in άctuary

2008 PBO FR 79% for S&P 500

leave a comment »

frpbosp5001999-20081For the S&P 500 as of 12/31/2008, the aggregate funded ratio of global defined benefit pension plans as of the end of fiscal years ending during 2008 was 79.0%, down drastically from 104.0% as of the close of the 2007 fiscal years, as measured on the basis of the ratio of market value of pension plan assets to projected benefit obligations.

We have yet to see whether 2009 will make this recent decline as severe as the 2001-2002 decline, although January and February certainly did nothing to stop the bleeding.

More details on funded status and other observations gleaned from corporate financial reports forthcoming soon.

(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.)

actuary cat feed subscribe to aftermath’s άctuary category

bumper sticker [www.internetbumperstickers.com] - actuary

Written by macheide

16 March 2009 at 5:31 pm

Posted in άctuary

2008 Pension Data Nearly Complete

leave a comment »

With GM finally releasing its bad-news annual financial statement for 2008, almost all 2008 GAAP data that has been publicly disclosed for pension plans is now available.

I collect as much if not more than anyone else out there, businesses and governmental agencies included. But since my pension information spreadsheet is as much a hobby as stamp collecting used to be for me, it will take a bit of time for me to catch up with this past week’s deluge. I’ll start with PBO funded ratio – a tick or two below 80% instead of the tick or two above that I had anticipated – and move step by step through other available data elements: pension cost; asset allocations; assumptions; and so on.

(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.)

actuary cat feed subscribe to aftermath’s άctuary category

bumper sticker [www.internetbumperstickers.com] - actuary

Written by macheide

5 March 2009 at 8:18 am

Posted in άctuary

Stepped into an Avalanche

leave a comment »

I now have 2008 pension data for over 75% (measured on the basis of 2007 pension assets) of the 12/31 fiscal year end filers for my data collection universe (S&P Composite 1500 plus some others, such as mutual insurance companies). And for companies with fiscal year ending any time during the year, I’ve now collected the 2008 financial statements for 500 pension plan sponsors, and counting, comprising over 80% of that data. Mainly, we’re just still waiting for GM to get with the program, as usual.

So far, just about everything is coming through precisely as I’ve been anticipating for most of the past year. For now, I’ll just keep on holding my hands out as the avalanche sweeps past me.

actuary cat feed subscribe to aftermath’s άctuary category

bumper sticker [www.internetbumperstickers.com] - actuary

Written by macheide

2 March 2009 at 5:54 pm

Posted in άctuary

Pension Disclosure Peeves 2008

leave a comment »

A few personal annoyances gained from poring over pension disclosures in the annual financial statements filed (or not yet filed) for the 2008 fiscal year –

  • Although it will take more detailed research to confirm this one way or the other, why does it appear so likely that Bank of America used $1.4 billion of the taxpayers’ bailout cash not to directly work on easing credit, but rather to make a voluntary contribution to its pension plan, thereby slightly softening the $5.3 billion investment loss its pension fund suffered during the year?
  • Tell me, why is General Motors compelled to file a 10-NT every year, when it’s become so predictable they don’t care to meet the same deadline almost every other company finds it possible to meet? (Hell, even AIG filed their annual financial statement by Monday morning, March 2.) If we have no muscle to expect GM to hold to the same schedule everyone else keeps, why not just amend Sarbanes-Oxley to say GM has twice the time a responsible company is given?
  • If Sprint Nextel can fool KPMG (its accountant) and the SEC into believing a pension plan that has lost about two thirds of a billion dollars of funded status in a single year is too “immaterial” to have GAAP enforced, then I’m glad I’m not one of its customers, the vast majority of whom must be downright trivial by comparison.
     
    Ditto Chubb and its accountant Ernst & Young, with pension plan assets and liabilities about the same size as those of Sprint, with roughly the same pension disclosure detail as Sprint, except not bothering to attempt Sprint’s ridiculous claim of immateriality to justify failure to adhere to GAAP.
  • If Embarq plans to continue to ignore recommended disclosure format given in published GAAP, a format followed relatively closely by every other company, choosing instead to use a counter-intuitive, confusing disclosure format, could not its accountant – KPMG once again – at least impose upon the company to provide a complete disclosure, instead of the existing haphazard scattershot half-disclosure?
  • The SEC, FASB, and auditors should establish and enforce rules that stipulate that a company such as Caterpillar has failed to meet disclosure requirements when it submits a financial statement that includes formatting coding such as <FONT style=” . . . FONT-SIZE: 6pt . . .”> that renders the supposed disclosure completely unreadable, even if the user attempts to use the browser to increase font size.

This brief list will no doubt be extended as I continue exploring pension disclosures.

(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.)

actuary cat feed subscribe to aftermath’s άctuary category

bumper sticker [www.internetbumperstickers.com] - actuary

Written by macheide

28 February 2009 at 10:55 pm

Posted in άctuary

2008’s Top Pension Story

leave a comment »

If net periodic pension costs for 2008 had been determined by immediately recognizing all experience (as is being currently contemplated by phase 2 of FASB’s pension accounting project), versus the deferral-and-smoothing methodologies of SFAS 87, then aggregate after-tax pension costs for 2008 would have completely wiped out all 2008 net corporate profits for U.S. pension plan sponsors.

As I’ve continuously reminded, any aftermath posts about pensions represent personal actuarial interests that are a “fave pastime,” a private hobby that is not connected with my formal work in any way whatsoever. Even so, to keep the lines as clear as possible, I’ve been password-protecting most of my posts under aftermath‘s άctuary category. But in the same spirit that I did not password-protect “Future Reading” – which three months ago anticipated this current post – so too I’ll leave this post open.

Measured on the basis of pension assets as of 12/31/2007, I now have about 40% of the 2008 details for companies within my personal data universe (S&P Composite 1500, plus certain additional companies, such as large mutual insurance companies) with fiscal years ending 12/31. (I already have in hand all data that has been filed for my data universe for companies with fiscal years ending before 12/31.) Most of the remaining data for 2008 will be filed with the SEC during the remainder of this week.

I don’t expect the remaining data to alter the conclusion stated at the beginning of this post. If pension costs were not spread in the manner required by current GAAP, then in the aggregate, pension plan sponsors would have had a net loss for 2008, with the pension plan experience more than wiping out all corporate income. Once the word on this gets out, no other 2008 pension story – not the expected return assumptions (which will face even more heated scrutiny), not the mild increase in employer contributions, not even the hundreds of billions of dollars of investment losses – will be as big.

actuary cat feed subscribe to aftermath’s άctuary category

bumper sticker [www.internetbumperstickers.com] - actuary

Written by macheide

25 February 2009 at 9:08 am

Posted in άctuary

20% of 12/31 Pension/OPEB Data

leave a comment »

For companies in our data collection universe (S&P Composite 1500 companies plus some extras, such as major insurance companies) that have a fiscal year ending December 31, we have now collected actual data from the 2008 annual statement for 70 companies, comprising over 20% of our data (as measured on the basis of pension assets as of the close of 2007). As most of the remaining 80% of the data floods in over the next week, basic trends for the full universe will vary only slightly from the interim results collected to this point —

  • mvapbo090213Pension Funded Status. For this subset of 70 companies that have filed their annual statements by 2/19, aggregate funded status for global defined benefit plans, measured on the basis of projected benefit obligations (PBO, red squares) as compared with the market value of plan assets (blue diamonds), declined from 104.4% at the end of 2007 to 76.7% at the end of 2008. In the aggregate, the subset lost $91.276 billion in PBO funded status during 2008, suggesting the aggregate loss in funded status for the entire universe may top $400 billion. Under prevailing accounting standards, that pension funded status loss (net of tax timing differences) has directly hit corporate balance sheets as a decrease in shareholder equity.
     
    Funded Status – Market Value of Assets vs Projected Benefit Obligations
    2/19 Subset of 12/31 Filers 2004 2005 2006 2007 2008
    Market Value of Pension Assets ($ billions) 262.962 284.538 320.160 344.416 252.643
    Projected Benefit Obligations ($ billions) 298.817 318.927 331.206 330.000 329.503
    Aggregate Funded Status ($ billions) (35.855) (34.389) (11.047) 14.416 (76.860)
    Aggregate Funded Ratio 88.00% 89.22% 96.66% 104.37% 76.67%
     

    Whereas 64 of the 70 companies had pension assets in excess of PBO at the end of 2007, only 4 had such a surplus at the end of 2008.
     
    As has been frequently noted in our posts, the aggregate funded status of all global pension plans includes foreign pension plans, which generally are less well funded than comparable U.S. pension plans, and supplemental executive retirement plans, which usually are completely unfunded. The aggregate funded status of qualified U.S. pension plans would be about 5 percentage points above the global results, i.e., about 82% for the 2/19 subset.

  • unfabo090219Pension Plans with Unfunded ABO. As noted in an earlier post, although the aggregate PBO funded status provides a comprehensive snapshot of pension health that is useful for some purposes, that number combines all pension plans across all companies, as if the surplus of one pension plan could be easily used to offset the deficit in another pension plan. Looking solely at pension plans that have assets (blue diamonds) less than accumulated benefit obligations (ABO, red squares), the 2/19 subset reported a deficit (orange circles) of $54.196 billion at the close of 2008, versus a deficit of only $16.579 billion at the end of 2007.
     
    Plans with Accumulated Benefit Obligation Less Than Market Value of Assets
    2/19 Subset of 12/31 Filers 2004 2005 2006 2007 2008
    Market Value of Pension Assets ($ billions) 91.161 90.370 70.813 55.228 191.303
    Accumulated Benefit Obligations ($ billions) 119.177 116.712 92.374 71.808 245.498
    Aggregate ABO Funded Status ($ billions) (28.016) (26.342) (21.561) (16.579) (54.196)
  • Pension Asset Return. For the 2/19 subset, the actual rate of return on pension assets during 2008 was -21.9%, significantly below the 10.5% rate of return experienced during 2007 and ending a five-year streak of excess gains.
  • Expected Rate of Return on Pension Assets. For the 2/19 subset, the asset-weighted expected rate of return on pension assets used to measure pension cost for 2008 was 8.2%, down slightly from the 8.3% assumption used for 2007 costs. Under prevailing accounting standards, this assumption is set at the beginning of a fiscal year and reflects long-term expectations, versus the retrospective one-year actual rate of return indicated above. Even so, expect to see very strong pressure on companies to reduce their expected return assumptions for costs during 2009.
     
    Expected Return vs Actual Return on Pension Assets
    2/19 Subset of 12/31 Filers 2004 2005 2006 2007 2008
    Expected Return on Assets ($ billions) 20.687 21.449 23.214 24.789 25.695
    Actual Return on Assets ($ billions) 28.527 29.105 36.695 33.080 (73.422)
    Expected Rate of Return 8.53% 8.46% 8.42% 8.32% 8.19%
    Actual Rate of Return 12.22% 11.23% 12.92% 10.48% -21.90%
  • Pension Asset Allocation. For the 2/19 subset, the asset-weighted allocation to equity investments dropped to 43.4% at the close of 2008, down from 55.6% at the close of 2007. In contrast, the allocation to bonds and other fixed investments rose to 41.0% from 32.0%. Although some of the decline in equity investment allocation is the natural result of sharply lower stock prices, a material portion of the drop can also be attributed to a permanent reallocation as many pension fund managers pursue new liability-matching strategies.
  • mvapbo090213Employer Contributions. For the 2/19 subset, employer contributions (blue diamonds) to global pension plans remained nearly level at $7.656 billion during 2008, compared with $7.600 billion during 2007, certainly not yet showing the wildly exaggerated predictions of dire drains on corporate cash that were widely publicized late last year. Similarly, despite the drastic losses in pension funded status during 2008, enormous credit balances accumulated by many of the largest companies during the early years of the decade should continue to moderate aggregate pension contribution increases during 2009 to levels significantly below the alarmist warnings still being broadcast this year.
     
    Employer contributions to pension plans during 2007 and 2008 (and 2009) can be considered as comprising four different classes of pension plans: (1) Non-qualified supplemental executive compensation plans, for which employer contributions primarily represent payment for benefits of previously retired corporate officers; (2) Foreign pension plans, which are not subject to U.S. funding rules; (3) Domestic qualified pension plans of smaller employers, which generally did not make large advance contributions earlier this decade; and (4) Domestic qualified pension plans of larger employers, many of which did make large advance contributions earlier this decade. Employers’ pension contributions during 2008 for the first 3 of these classes generally remained at or slightly above the 2007 contribution levels; while contributions for the 4th class generally dropped or remained at zero, as those plans took “contribution holidays” reflecting the advance contributions. Despite the drastic losses during 2008, many companies will be able to continue those contribution holidays for 2009.
  • Pension Cost. Since current accounting standards defer and smooth pension experience, for the 2/19 subset the net periodic pension cost (red squares in the graph provided under the employer contribution section) for 2008 was $3.673 billion, down significantly from the $6.576 billion cost for 2007. Thus, as bad as 2008 was both for pension plans and for pension plan sponsors, corporate earnings were actually helped by pension plans during 2008, at least as compared with the previous year.
     
    As discussed in a previous post, some critics of prevailing pension accounting standards suggest that all pension experience should be recognized immediately. If that accounting had been used for all years, then for the 2/19 subset the 2008 pension cost would have been $95.427 billion, versus a pension income (i.e., negative pension cost) of $16.999 billion for 2007.
  • Discount Rate Assumption. For the 2/19 subset, the obligation-weighted discount rate used to measure PBO as of the close of 2008 was 6.23%, up slightly from the 6.17% discount rate assumption at the close of 2007.
  • OPEB Funded Status. For the 2/19 subset, the funded status of other post-employment benefits (OPEBs, primarily retiree health insurance benefits) remained nearly level, actually improving by $0.215 billion during 2008. Since OPEBs are significantly less funded than pension plans, OPEB funded status did not suffer as much from 2008’s bad investment experience as did pension plans.
  • OPEB Employer Contributions. For the 2/19 subset, employer contributions to OPEBs increased slightly to $4.049 billion during 2008, up from $3.496 during 2007.
  • OPEB Cost. For the 2/19 subset, net periodic benefit cost for OPEBs decreased to $4.301 billion during 2008, down slightly from $4.450 during 2007.

(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.)

actuary cat feed subscribe to aftermath’s άctuary category

bumper sticker [www.internetbumperstickers.com] - actuary

Written by macheide

19 February 2009 at 7:19 pm

Posted in άctuary

12/31 Pension/OPEB – 2/17 Update

leave a comment »

Updated for new data on Feb 19

 
For companies in our data collection universe (S&P Composite 1500 companies plus some extras, such as major insurance companies) that have a fiscal year ending December 31, we have now collected actual data from the 2008 annual statement for 45 companies, comprising just over 14.0% of our data (as measured on the basis of pension assets as of the close of 2007). Although basic trends for the full universe will vary slightly from the interim results collected to this point, the final picture continues to come into focus —

  • mvapbo090213Pension Funded Status. For this subset of 45 companies that have filed their annual statements by 2/17, aggregate funded status for global defined benefit plans, measured on the basis of projected benefit obligations (PBO, red squares) as compared with the market value of plan assets (blue diamonds), declined from 102.2% at the end of 2007 to 77.1% at the end of 2008. In the aggregate, the subset lost $56.673 billion in PBO funded status during 2008, suggesting the aggregate loss in funded status for the entire universe may top $400 billion. Under prevailing accounting standards, that pension funded status loss (net of tax timing differences) has directly hit corporate balance sheets as a decrease in shareholder equity.
     
    Funded Status – Market Value of Assets vs Projected Benefit Obligations
    2/17 Subset of 12/31 Filers 2004 2005 2006 2007 2008
    Market Value of Pension Assets ($ billions) 175.508 193.235 216.933 231,817 173.834
    Projected Benefit Obligations ($ billions) 202.611 217.327 226.537 226.869 225.559
    Aggregate Funded Status ($ billions) (27.103) (24.092) (9.604) 4.948 (51.725)
    Aggregate Funded Ratio 86.62% 88.91% 95.76% 102.18% 77.07%
     

    Whereas 40 of the 45 companies had pension assets in excess of PBO at the end of 2007, only 2 had such a surplus at the end of 2008.
     
    As has been frequently noted in our posts, the aggregate funded status of all global pension plans includes foreign pension plans, which generally are less well funded than comparable U.S. pension plans, and supplemental executive retirement plans, which usually are completely unfunded. The aggregate funded status of qualified U.S. pension plans would be about 5 percentage points above the global results.

  • Pension Plans with Unfunded ABO. As noted in an earlier post, although the aggregate PBO funded status provides a useful comprehensive snapshot of pension health, that number combines all pension plans across all companies, as if the surplus of one pension plan could be easily used to offset the deficit in another pension plan. Looking solely at pension plans that have assets less than accumulated benefit obligations (ABO), the 2/17 subset reported a deficit of $34.838 billion at the close of 2008, versus a deficit of only $9.041 billion at the end of 2007.
     
    Plans with Accumulated Benefit Obligation Less Than Market Value of Assets
    2/17 Subset of 12/31 Filers 2004 2005 2006 2007 2008
    Market Value of Pension Assets ($ billions) 64.926 58.555 38.641 27.947 152.695
    Accumulated Benefit Obligations ($ billions) 80.017 71.318 48.389 36.988 187.532
    Aggregate ABO Funded Status ($ billions) (15.091) (12.763) (9.747) (9.041) (34.838)
  • Pension Asset Return. For the 2/17 subset, the actual rate of return on pension assets during 2008 was -19.88%, significantly below the 10.02% rate of return experienced during 2007 and ending a five-year streak of excess gains.
  • Expected Rate of Return on Pension Assets. For the 2/17 subset, the asset-weighted expected rate of return on pension assets used to measure pension cost for 2008 was 8.13%, down slightly from the 8.31% assumption used for 2007 costs. Under prevailing accounting standards, this assumption is set at the beginning of a fiscal year and reflects long-term expectations, versus the retrospective one-year actual rate of return indicated above. Even so, expect to see very strong pressure on companies to reduce their expected return assumptions for costs during 2009.
     
    Expected Return vs Actual Return on Pension Assets
    2/17 Subset of 12/31 Filers 2004 2005 2006 2007 2008
    Expected Return on Assets ($ billions) 13.784 14.549 15.920 16.991 16.990
    Actual Return on Assets ($ billions) 19.575 19.989 23.908 21.410 (44.784)
    Expected Rate of Return 8.62% 8.54% 8.46% 8.31% 8.13%
    Actual Rate of Return 12.60% 11.46% 12.38% 10.02% -19.88%
  • Pension Asset Allocation. For the 2/17 subset, the asset-weighted allocation to equity investments dropped to 40.6% at the close of 2008, down from 53.0% at the close of 2007. In contrast, the allocation to bonds and other fixed investments rose to 42.7% from 33.5%. Although some of the decline in equity investment allocation is the natural result of sharply lower stock prices, a material portion of the drop can also be attributed to a permanent reallocation as many pension fund managers pursue new liability-matching strategies.
  • mvapbo090213Employer Contributions. For the 2/17 subset, employer contributions (blue diamonds) to global pension plans increased to $4.964 billion during 2008, up slightly from $4.481 billion during 2007. We expect the aggregate employer contribution for the entire universe to be relatively level or slightly decreasing, but certainly not yet showing the wildly exaggerated predictions of dire drains on corporate cash that were widely publicized late last year. Similarly, despite the drastic losses in pension funded status during 2008, enormous credit balances accumulated by many of the largest companies during the early years of the decade should continue to moderate aggregate pension contribution increases during 2009 to levels significantly below most of the warnings being broadcast.
     
    Employer contributions to pension plans during 2007 and 2008 can be considered as comprising four different classes of pension plans: (1) Non-qualified supplemental executive compensation plans, for which employer contributions primarily represent payment for benefits of previously retired corporate officers; (2) Foreign pension plans, which are not subject to U.S. funding rules; (3) Domestic qualified pension plans of smaller employers, which generally did not make large advance contributions earlier this decade; and (4) Domestic qualified pension plans of larger employers, many of which did make large advance contributions earlier this decade. Employers’ pension contributions during 2008 for the first 3 of these classes generally remained at or slightly above the 2007 contribution levels; while contributions for the 4th class generally dropped or remained at zero, as those plans took “contribution holidays” reflecting the advance contributions.
  • Pension Cost. Since current accounting standards defer and smooth pension experience, for the 2/17 subset the net periodic pension cost (red squares in the graph provided under the employer contribution section) for 2008 was $1.739 billion, down significantly from the $3.650 billion cost for 2007. Thus, as bad as 2008 was both for pension plans and for pension plan sponsors, corporate earnings were actually helped by pension plans during 2008, at least as compared with the previous year.
     
    As discussed in a previous post, some critics of prevailing pension accounting standards suggest that all pension experience should be recognized immediately. If that accounting had been used for all years, then for the 2/17 subset the 2008 pension cost would have been $58.727 billion, versus a pension income (i.e., negative pension cost) of $9.309 billion for 2007.
  • Discount Rate Assumption. For the 2/17 subset, the obligation-weighted discount rate used to measure PBO as of the close of 2008 was 6.25%, up slightly from the 6.15% discount rate assumption at the close of 2007.
  • OPEB Funded Status. For the 2/17 subset, the funded status of other post-employment benefits (OPEBs, primarily retiree health insurance benefits) declined by only $1.323 billion during 2008, only about 2% of the drain on shareholder equity from pension plans. Since OPEBs are significantly less funded than pension plans, OPEB funded status did not suffer as much from 2008’s bad investment experience as did pension plans.
  • OPEB Employer Contributions. For the 2/17 subset, employer contributions to OPEBs decreased slightly to $1.788 billion during 2008, down from $1.869 during 2007.
  • OPEB Cost. For the 2/17 subset, net periodic benefit cost for OPEBs decreased to $2.050 billion during 2008, down slightly from $2.306 during 2007.

(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.)

actuary cat feed subscribe to aftermath’s άctuary category

bumper sticker [www.internetbumperstickers.com] - actuary

Written by macheide

17 February 2009 at 5:17 pm

Posted in άctuary

12/31 Pension/OPEB Mid-Feb Update

leave a comment »

Updated for new data on Feb 17

 
For companies in our data collection universe (S&P Composite 1500 companies plus some extras, such as major insurance companies) that have a fiscal year ending December 31, we have now collected 2008 data for 33 companies, comprising about 11.7% of our data (as measured on the basis of pension assets as of the close of 2007). Although basic trends for the full universe will vary slightly from the interim results collected to this point, the complete picture continues to come into focus — Read the rest of this entry »

Written by macheide

13 February 2009 at 8:53 pm

Posted in άctuary

12/31 Pension/OPEB Update

leave a comment »

Updated for new data on Feb 13

 
For companies in our data collection universe (S&P Composite 1500 companies plus some extras, such as major insurance companies) that have a fiscal year ending December 31, we have now collected 2008 data for 21 companies, comprising about 8.7% of our data (as measured on the basis of pension assets as of the close of 2007). Although basic trends for the full universe will vary slightly from the interim results collected to this point, the complete picture continues to come into focus — Read the rest of this entry »

Written by macheide

12 February 2009 at 6:06 pm

Posted in άctuary

7% of 12/31 Pension Data Now In

leave a comment »

Updated for new data on Feb 12

 

For companies in our data collection universe (S&P Composite 1500 companies plus some extras, such as major insurance companies) that have a fiscal year ending December 31, we now have 7.0% of our 2008 data (as measured on the basis of pension assets as of the close of 2007). Although results for the full universe will vary slightly from the interim results collected to this point, the complete picture continues to come into focus — Read the rest of this entry »

Written by macheide

11 February 2009 at 8:55 pm

Posted in άctuary

Another 12/31 Pension Elephant

leave a comment »

Updated for new data on Feb 11

 

Still at only 5.3% of my current data collection universe (S&P Composite 1500 companies plus some extras, such as major insurance companies; looking solely at companies with fiscal year ending 12/31, with the percentage measured on the basis of pension assets as of the close of 2007), we still have only early indications of the complete results that will emerge. But with our second elephant (Northrup) belly-flopping into the pool, we’re expecting to see all our interim results from here on out to be more closely resembling the final picture than did the first few posts late last week — Read the rest of this entry »

Written by macheide

10 February 2009 at 3:58 pm

Posted in άctuary

First 12/31 Pension Elephant

leave a comment »

Updated for new data on Feb 10

 

Although the first batch of 12/31 year-end financial statements were indicating pension funded status down in the 60s, I’ve been holding out for more data to come in, pointing to an expectation that the aggregate funded status for the entire S&P Composite 1500 universe will likely be a few ticks north of 80%. Today, the first of the elephants did a cannonball into our pool – Boeing. And as expected, the numbers are starting to come into focus.

Measured on the basis of 2007 pension assets, so far we now have about 3.89% of 12/31 filers among my universe (S&P Composite 1500 companies plus some extras, such as major insurance companies). That subset’s pension plans’ pension assets had an aggregate investment yield of -17%, eroding the aggregate funded status to 78% by the close of 2008, a drastic drop from 106% the previous year. For the full 12/31 subset, we still expect the funded status as of the close of 2008 to be slightly higher (as noted, a few ticks north of 80%).

On the basis of the pension plans’ accumulated benefit obligation, this subset dropped from a surplus of $8.8 billion at the end of 2007 to a deficit of $9.2 billion at the end of 2008, a loss of $18 billion in funded status. Pretty severe, considering we’re still looking at less than 4% of the full set.

(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.)

actuary cat feed subscribe to aftermath’s άctuary category

bumper sticker [www.internetbumperstickers.com] - actuary

Written by macheide

9 February 2009 at 10:25 pm

Posted in άctuary

12/31 Pension Data Still Dripping In

leave a comment »

Updated for new data on Feb 9

 

As noted this past week, the 2008 annual reports for companies with fiscal years ending December 31 are starting to trickle in. Measured on the basis of 2007 pension assets, so far we now have about 3/4 of 1% of my total universe (S&P Composite 1500 plus some extras, such as major insurance companies), still barely filling the pool enough to get our feet wet, but already starting to resemble early election night returns.

We still don’t have enough to rely on just yet, but for the record, that small subset’s pension plans’ pension assets had an investment yield of -26%, eroding the aggregate funded status to 63% by the close of 2008, a drastic drop from 93% the previous year. For the full 12/31 subset, we expect the funded status as of the close of 2008 to be higher (a few ticks north of 80%) and the drop to have been slightly less severe (with the full subset being less heavily invested in equities and having more foreign plan exposure, both of which should moderate the decline).

(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.)

actuary cat feed subscribe to aftermath’s άctuary category

bumper sticker [www.internetbumperstickers.com] - actuary

Written by macheide

8 February 2009 at 5:49 pm

Posted in άctuary

12/31 10-K Season Open!

leave a comment »

The 2008 annual reports for companies with fiscal years ending December 31 are starting to trickle in!! It’s only a faucet drip so far – measured on the basis of 2007 pension assets, so far we only have about 1/20 of 1% of my total universe (S&P Composite 1500 plus some extras, such as major insurance companies), barely a teaspoon in the swimming pool. But it will build daily from here to an avalanche by the end of the month, by which time we’ll have virtually all 2008 data in hand.

That teaspoon in the swimming pool isn’t really enough to rely on just yet, but for the record, that very minuscule subset’s pension plans saw funded status drop to 67% by the close of 2008, a drastic drop from 91% the previous year. For the full 12/31 subset, we expect the funded status as of the close of 2008 to be higher (a few ticks north of 80%) and the drop to have been slightly less severe (with the full subset being less heavily invested in equities and having more foreign plan exposure, both of which should moderate the decline).

(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.)

actuary cat feed subscribe to aftermath’s άctuary category

bumper sticker [www.internetbumperstickers.com] - actuary

Written by macheide

6 February 2009 at 3:50 pm

Posted in άctuary