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Honeywell's Pension Underfunding Mea Culpa
Today's Honeywell investor presentation provided another example of the wholesale "kick the can down the road" mentality that has gripped America. And while this myopic approach to the future is fully expected out of the 218 patriots who voted to keep increasing America's debt ceiling, impending debt repudiation be damned, such a shallow view has traditionally not been expected out of corporate America. Until now.
On page 12 of its investor presentation, Honeywell, demonstrating the PR savvy of your run-off-the-mill prebuscent, explains its pension funding shortcomings...by highlighting the deficits of others. Sorry, Honeywell, but this is not a Mac vs PC ad campaign. As the chart below demonstrates, Honeywell has a total underfunded status of almost $4 billion. Yet, "Honeywell is not an outlier" - as if this is supposed to make things all rosy somehow. Just maybe another way of reading this data is that the entire industry is screwed, with over $20 billion in underfunded pensions, or -18% in underfunding as a percentage of all pension liabilities.
Or maybe Honeywell's management team is making the Too Big To Fail case. Of course, in that case it needs to crank up its pension underfunding to surpass GE on an absolute basis and DHR on a relative one. Because where it stands now, Honeywell's troubles are merely Lehman-like in their systemic threat status. And we all know what happened to Lehman.
Then again, just as Social Security is the supremely unfixable black hole, so are corporate pension plans. Just like taxpayers have given up hope that the US budget will ever make sense when accounting for the nearly $100 trillion in non federal debt liabilities, so have HON's investors (and all others) given up pretending to worry about such trivial issues as pension plan underfunding. After all there are stock gains to be had today; in a few years not only the company but the entire economy will be gone... so who cares?
h/t Geoffrey Batt
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Look mom, it's a pensions beauty contest, except they're all ugly and getting uglier as time goes by. Shame on them and thanks for posting.
Leo, maybe you've already written about this and I missed it, but how does the impending public/private pension time bomb (a/k/a the massive unfunded accrued liabilities) factor into your bullish thesis?
Underfunded pensions are irrelevant. If anything, it creates more financial leverage which should magnify your return in a rising market and a strong economic recovery. I would buy the companies with the largest underfunded pensions (airlines, autos, industrials, etc.) given your outlook for 2010.
Yeesh, someone's getting bitter and it looks
ugly on them.
That's a cynical assessment, even for you, Tyler. The entire economy?
Honeywell has a $30 billion dollar market cap. How is it a problem for anyone besides shareholders if the pension is underfunded by $4 billion?
Well, it's, ummmm ... kind of a problem for the pensioners too, don't ya think?
First these companies lay us off. Then they underfund the pension fund. Then they pay their executives big bonuses. Repeat process until uh-oh. Then government takes over pension fund. Then they ignore the Constitution. Then they bail out firms with large campaign contributors. Then they raise taxes. Then they promise to contain the crisis. Then they raise the debt limits. Then they let banks screw the public. Then they refuse to prosecute the screwers. Then they promise to fix these problems. Then they get reelected. Repeat the process.
This study estimates the Pension Benefit Guaranty Corporation, which assumes pension funds from bankrupt companies, is as much as $100 billion underfunded.
http://www.brookings.edu/papers/2009/0604_pbgc_elliott.aspx
It should be about time for Congress to give companies relaxed accounting rules to let them spread pension shortfalls over a greater number of years and reduce their pension contributions.
@Green Sharts,
Why should contribution rules be relaxed? Wouldn't that just kick the can down the road? If the pensions are an anathema to the financial well-being of companies, why not admit it now so that the charade can be exposed and individuals can start planning on a different future? This is much like America's addicition to all things debt.
Never mind, I'm way behind the curve on this one. Congress fast tracked pension relief through just over a year ago.
http://www.nytimes.com/2008/12/12/business/12pension.html
<Companies whose pension funds suffered big losses this year will not have to replenish the money quickly under a relief measure that flew through the Senate Thursday and will next go to the president for his signature.
Because of strong market performance, big contributions made in the past, and a two-year phase-in of tougher financing rules passed in 2006, many companies have not had to pump much money into their pension funds in the last few years. But they suddenly faced the prospect of having to come up with a lot of cash because of this year’s financial crisis.>
<Because companies can deduct their pension contributions, giving them relief actually saves the Treasury money. A Senate analysis of the bill projected that it would increase federal tax revenue by a little more than $100 million over 10 years.
Unlike previous pension measures that took years to be hashed out, this bill went flying through both houses of Congress on special fast-track procedures. The House of Representatives passed the same bill unanimously on Wednesday.
The bill rolls back parts of the Pension Protection Act of 2006, which was intended to close loopholes in the federal law that requires companies to put adequate money behind their pension promises. The loopholes became starkly apparent at the beginning of this decade, when a number of big steel and airline pension funds collapsed, forcing the federal pension insurance program to absorb billions of dollars in losses.>
<The Pension Protection Act was meant to reduce the government’s exposure to such stock-market losses by discouraging companies from investing their pension funds in volatile assets. It gave them seven years to bring their pension funds into balance, with 100 percent of the money needed to pay for the benefits they had promised. The law made no exceptions for a pension fund that lost money while working its way toward the 100 percent target — the company still had to find a way to get it up to 100 percent within seven years.
The new relief measure eases that requirement, giving companies that have big investment losses lower targets to shoot for over the seven-year time frame.>
Now Congress is working on expanding pension relief to nonprofit organizations:
http://philanthropy.com/news/updates/index.php?id=9980
<Two members of Congress have introduced a bill that would ease rules that govern how charities and other employers make payments to defined-benefit pension plans, which provide specific amounts of money to retired workers.
The stock-market crash has left many nonprofit organizations struggling to set aside money for future payments to retired employees.
“The cornerstone of this bill is temporary pension funding relief that eases an employer’s obligation to make up for the investment losses that pension plans experienced in 2008,” said Rep. Earl Pomeroy, a North Dakota Democrat who is sponsoring the bill with Rep. Patrick J. Tiberi, an Ohio Republican. “At the same time, employees would get important assurances that their retirement benefits will continue to grow.”>
While this relief is somewhat understandable, when a society kicks virtually all of the problems down the road you have to wonder what happens when we're down the road. The bond manager Jeff Gundlach (recently fired by TCW as noted in a number of ZH posts) made a presentation called "Too Good to Be True" in September that included a picture of Wimpy from the old Popeye cartoons. For those old enough to remember, Wimpy's slogan was "I'll gladly pay you Tuesday for a hamburger today."
Thanks for the link. Couldn't find what assumptions are being used to calculate the projected liability these days. About 10 years ago, I valued a defined pension plan as part of a business acquisition. Shocker - the assumptions and accounting rules were agressive then.
Oh well, inflation will - at the expense of pensioners = mitigate this 'problem' too. At least they will have what's left of their 401ks to rely on.
Can you say 'welcome to Walmart, sonnny'?
Exactly. Massive inflation is what the Fed and minions are not only trying to create but are counting on to make these very big problems appear smaller and more manageable in 5 and 10 years. It's the only way they can keep the current system moving down the road for any length of time.
wow
must.....buy.....stocks......at.....23x fwd estimates......must....buy......must...
ufb
Pensions are a great way to get people to work cheap or make them feel like they are really valuable until you screw them over with JUST KIDDING. So many games played so many ways.
Pensions were always a scam. Every company that tries to keep one eventually goes under, becasue companies that dont have one (and probably no union) can produce things for a fraction of the cost.
That's a crock of shit, pensions do not hinder companies competiveness, it's corrupt greedy managment, like GM, which paid out big bonuses instead of funding the pension plan. Had GM acted responsibly in the 70 and 80's they would not have the funding problems today that raise the price of their cars. For reference see: http://en.wikipedia.org/wiki/Roger_&_Me
At some point you have to view workers as assets not expenses. Once you make that mindset change the overall finanical picture becomes balanced. You sound to me like someone who never made a payroll, but somehow is an authority on pensions.
Workers are assets...when they cooperate.
How cooperative are UAW members?
Underfunding pensions is bad. Sitting on your ass all day, eating your organic carrots, pretending your irreplacable, because you got the muscle to back you up, is also bad.
That's a crock of shit, pensions do not hinder companies competiveness, it's corrupt greedy managment, like GM, which paid out big bonuses instead of funding the pension plan. Had GM acted responsibly in the 70 and 80's they would not have the funding problems today that raise the price of their cars. For reference see: http://en.wikipedia.org/wiki/Roger_&_Me
At some point you have to view workers as assets not expenses. Once you make that mindset change the overall finanical picture becomes balanced. You sound to me like someone who never made a payroll, but somehow is an authority on pensions.
Bernanke's fund was run like most pension plans, no? When someone wants to get out, just find a few more who want in. I can't wait for the auctions to start!
corporate underfunded pensions arent as big of a deal as state pensions gone bust. in NJ this is happening
corporates can unload it to the pbgc and shift the losses to the taxpayers.
i hope it all goes boom. fuck em all. not my pension, i'm not paying for shit
Why not report everything is okay, well-funded etc.?? Taking a page from the book of Madoff and European SS model.
"such a shallow view has traditionally not been expected out of corporate America. Until now."
Tyler, you are funny. I spit out my coffee when I read this. Pensions have been always been underfunded (at least in the USA). That's why the enacted ERISA in the 1970s. But ERISA was a scam, at least for defined benefit plans. It tried to protect retirees but all it did was shift the costs of underfunded plans to the government and to those employers whose plans were closer to being properly funded by greatly mispricing the insurance that was required to be paid. I.e., it forced taxpayers and those employers who were less irresponsible (I don't want to say responsible because virtually all plans were underfunded to some extent unless you used very aggressive and unrealistic assumptions) to pay for those employers who were more irresponsible. And it continued to let plans use very aggressive assumptions to determine how to fund the plans.
Employers pulled money out of their plans at every opportunity, e.g., every time the stock or bond market went up the plans would switch their investments after the run-up, use the fantasy that the market would continue to go up forever at the same rate it had (over whatever period gave the best results) and pull out as much money as possible, making the plan even more underfunded if one used realistic assumptions. Virtually all of them were underfunded, many badly. Everyone who knew anything about pensions knew that.
Neither kick the can nor corporate myopia and irresponsibility is new. To think otherwise is extremely naive.
Aren't all pensions supposed to be fully funded by 2011....or has the FASB gone back that too?????? Someone please help me on this one.