Posted by: Howard Silverblatt on May 26, 2011
For over seventy years, the relationship between employee and employer not only encompassed the exchange of services for compensation, but extended to obligations in the form of pensions and Other Post Employment Benefits (OPEB), specifically medical care. These benefits are staples of the American dream and marketplace with their related expenditures built into the cost of products and services. As U.S. economic dominance has shifted, the ability of U.S. companies to pass along the costs — which many foreign competitors do not have — associated with retirement to consumers has significantly diminished to a level that endangers many companies’ competitiveness. The bear markets of 2000-2002, and 2007-2008 drastically reduced private funds’ pension fund reserves, while the bull markets of 2003-2007, and 2009 to the present added some of the amounts back, although the funds remain significantly underfunded. The current recovery in S&P 500 earnings — which are matching pre-recessionary levels and are expected to post a record for 2011 — combined with the 2010 record level of both cash-flow and free cash-flow, have resulted in a record level of available cash, which by historical comparisons drastically exceeds current needs, at a time when income is still increasing. The result is that even with massive underfunding, S&P 500 pension costs have now become a reasonably-controlled expense to corporations, with costs and outflows fitting well within income and assets levels, as well as, cash-flow. S&P Indices® however, believes that the current state of the regulated pension system includes archaic accounting regulations that distort the financial position of pension funds and their sponsors, in addition to, a pay-as-you-go OPEB system with very little funding or legal guarantees.
The new reality for companies is that pensions have become an acceptable expense, with new social limits to its growth and limited area for its expansion. Companies have successfully shifted a considerable amount of the risk associated with defined programs to set contribution programs, transferring the risk from the company to the individual. The result is a legacy program which over the next several decades will mostly work its way out of the last bastions of the U.S. labor market, and out of existence.For individuals, the personal wealth depletion — via lower housing prices and current market evaluations, combined with prolonged high unemployment and lower pension and OPEB benefits (as longevity and the cost of staying healthy continue to escalate) — has left potential retirees with little ability to retire. The current economic reality of strained government programs, the need for additional revenue (taxes), reduced spending (entitlement programs) and higher social costs have heralded a return to the retirement of prior generations: you work for most of your longer life and spend your remaining years in retirement in a reduced lifestyle.
The new reality replaces the American dream of a golden retirement for soon-to-be baby boomers, which based on their available resources, leaves few options for a comfortable retirement, and there are fewer years for boomers to significantly add income to their retirement resources - outside of working longer. Even with a 15% equity return and a market recovery of over 45% over the past two years, S&P 500 companies still could not put a dent into the pension underfunding situation.
Underfunding slightly improved to a US$ 245 billion shortfall, from a shortfall of US$ 261 billion in 2009; 1999 was a $280 billion surplus.
Pension funding rate increased to 83.9% from 81.7%.
Discount rate declined to 5.31% from 5.81%.
Expected return rate declined to 7.73% from 7.83%, 10th consecutive annual decrease Funds transfer equity profits to reallocate asset positions, maintaining a reduced equity allocation of 51%.
Companies have shifted a considerable amount of the risk associated with pensions to the individual.
Defined pension now appear to be a legacy program, which over the next several decades, will mostly work its way out of the last bastions of the U.S. labor market, and out of existence.
OPEB underfunding remains massive and unfunded.
Underfunding slightly reduced to US$ 210 billion from US$ 215 billion in 2009.
US$ 274.1 billion in OPEB obligations, and only US$ 64.5 billion in assets.
Pay-as-you-go OPEB remains a target for cuts, concerns and human casualties.
The responsibility of providing post-retirement medical care is now shifting away from corporate programs to individuals and to U.S. social policy.
For the full S&P 500 Pension and OPEB report, please click here pensions_and opeb_2010_data.doc