Posted by: Howard Silverblatt on November 12, 2008
A lobbying group has sent the U.S. Congress a letter (signed by 300 companies: public, private, business groups) asking that the funding requirements for Defined Pensions under the Pension Protection Act of 2006 be suspend for one year. The letter states that current market conditions have deteriorated their assets and that if plan sponsors divert cash to the pensions it “will increase unemployment and slow our economic recovery”.
There have been discussions of this for several weeks now. Congress, if it desires, can amend the rules when it comes back into session next Monday (11/17), or in January (under new management), making the rules retroactive, prior to the required payments. As noted below (Oct 22 posting), pensions have the potential to set a new under funding record this year (2002 was -$219B). While assets are the center, the key item is the liabilities. Due to the current yield curve the rate used to determine liabilities is high, the discounted liabilities are therefore smaller, making pension funding appear at a higher level. The joke, back in 2002, was that if rates were high enough pensions would be fully funded. While rates are no where near that high, the situation has to be looked at not just from a GAAP and ERISA basis, but from cash flow. With retirees living longer and the ranks of retirees growing due to recent layoffs and packages, time for assets to recoup from the current downturn is limited, and rates remain anything but stable. On aggregate, S&P Industrial (Old) companies have sufficient cash on the side line (record Q2 value of $648B) to cover pension costs, but that’s on aggregate. There are a host of high-priority issues before congress and the administration, this, while much lower down, is now on the table.
October 22, 2008
COMPANY PENSIONS THAT WERE OVER FUNDED ARE EXPECTED TO TAKE A HIT, A VERY BIG HIT
Last year S&P 500 companies were able to brag with $63 billion in over funding for their pension funds, a value not seen since 1995. Well, its ten months later, and at this point it looks like they are on the way to reporting the largest under funding in history.
Going into the year the companies estimated an 8% return on their pension assets for 2008, and used those numbers in their reporting, allocations, and planned contributions. They had 61% of their money in Equity, 28% in Fixed Income, 4% in Real Estate and 7% in the catch all Other category. They also had 15% in foreign markets, which significantly helped them obtain that over funding status last year. Well, while someone might be doing 8%, the reality is that any pension fund manager that is even breaking even this year is most likely demanding a bonus. The U.S. market is down over a third, and that’s good compared to the Emerging markets that are down over half this year alone – so that 61% in Equity may not be doing that well. Interest rates are down, but the key to the 28% in Fixed Income is what instruments you are invested in. At best a small profit would be nice; at worst, some of the fixed investments may make the mark to market level three look good. When you calculate it all out at the current market returns, or even assuming a nice Q4 rebound, you get a number that is worse than the $219 billion in under funding reported in 2002, and that’s after starting from the positive 2007 $63 billion position.
Since 2002 the accounting requirements have changed, and companies now have to put their funding status on the balance sheet; and since assets still equal liabilities, equity will have to be marked down. The under funding will also have to be addressed with large unplanned cash infusions, which will come at a time when liquidity is tight. Overall, I expect few companies to remain over funded and for the payments to add more pressure on companies to reduce the already dwindling number of defined pension programs out there.
Then there are retiree medical programs, but going into that might be hazardous to your health.
If you want the2007 pension report, please click on the link