Monday, December 8, 2008 0 comments ++[ CLICK TO COMMENT ]++

Unfolding pension disaster

I have alluded to Warren Buffett's past warnings regarding the rosy projections built into some corporate pension plans. Investors have been completely ignoring that issue for years and will probably do so until it's too late. It looks like some companies are not going to be able to meet legal requirements and are lobbying to get more time.

Pension funds at Pfizer Inc., International Business Machines Corp., United Parcel Service Inc. and dozens of other companies have joined the parade of businesses seeking relief from Congress amid this year’s economic meltdown.

Instead of money, they want legislation to suspend a federal law that would make them pump billions of dollars into retirement plans to offset stock-market losses as many struggle to find enough cash just to stay in business. They’re pressing Congress to consider the issue this week before this year’s session adjourns.

...

About 800 companies in the Standard & Poor’s 1500 Index have pension funds, and they were collectively $280 billion short of the sums needed to pay projected benefits as of Nov. 30, according to a study by New York-based benefits consulting firm Mercer LLC. Those 800 funds started the year with a $60 billion surplus, Mercer estimated.


Now, ignore the debate over the law and whether it is too strict and the time period should be extended. Instead, look at the massive flip to a $280 billion shortfall from a $60 billion surplus at the start of this year. It kind of shows the risk management at these firms (note that pension investments are supposed to be more conservative and shouldn't be gambling in risky assets) and it basically means that all the pension consultants and portfolio managers have been betting on volatile assets like stocks and possibly alternative assets such as commodities, private equity holdings, and hedge fund investments. Now, if you are an investor in one of the aforementioned firms such as Pfizer or IBM, these shortfalls have to be made up before shareholders get paid. The numbers aren't very large ($280 billion across 800 businesses means $350m per business) but they are not insignificant either. Three hundread and fifty million is quite a bit of money that needs to come out of profits for the average S&P 1500 constituent. Now, one can argue that the assets held by these pensions are undervalued and that these payments are over a long period of time but, if you are conservative, you can never be sure about the direction of the movement of asset prices.

Oh well, another bearish reason to mark down future expected return for some of these companies.

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