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US Corporate Pension Deficits Widen in June
Timothy
Inklebarger of Pension & Investments reports, Funding
ratio of corporate plans drops in June:
The
funded ratio of the typical corporate U.S. pension plan fell 6
percentage points in June to 74%, the result of U.S. stock market
declines and low interest rates, according to an analysis by BNY
Mellon Asset Management.
The drop puts the funded ratio of
the typical plan at its lowest level since February 2009, when the
funded ratio was 73%. Funded status has declined 9.5 percentage points
since the beginning of 2010.
The
analysis almost mirrors a report released Monday by Mercer, saying the
funded ratio of S&P 1500 companies dropped five percentage points
in June to 73%.
Assets for the typical corporate U.S. pension
plans dropped 2.3% in June, while liabilities increased 5.6% over the
same period of time.
“What we saw in May and June is two months
of declining interest rates (along with) a dramatic drop in asset
values,” Peter Austin, executive director of BNY Mellon Pension
Services, the pension services arm of BNY
Mellon Asset Management, said in a telephone interview.
He
said the market is “very jittery,” driven in part by the sovereign debt
crisis.While the drop in funded status is bad news for pension
plans, Mr. Austin said it refocuses attention on commitment to funding
and better managing risk.
The WSJ also reports, Funded
Status Of US Corporate Pension Plans At 16-Month Low:
The
funded status of U.S. corporate pension plans slumped in June to a
16-month low, pressured by stock-market declines and lower interest
rates, according to an arm of Bank of New York Mellon Corp. (BK).
The amount of assets compared with obligations at a typical U.S.
corporate pension plan declined to 74% from 80% in May. The funded
status slumped 9.5 percentage points in the first half of 2010.
Falling stock markets resulted in a
2.3% drop in assets at the typical corporate plan, while liabilities
increased "sharply," rising 5.6%, said BNY Mellon Pension Services.
Its executive director, Peter Austin, said, "There doesn't appear to
be a quick fix on the horizon. Poor asset returns and dropping interest
rates are prompting both corporate and public-sector plans to consider
more active approaches to managing their funding strategies."
There
is no "quick fix" to pension deficits. I had lunch today with an
experienced pension consultant who told me flat out that pension
deficits are going to get a lot worse, and he fears that we're heading
into a full blown crisis in less than 20 years.
Think about it
logically. Bond yields at a historic low, so liabilities are growing
while expected returns on assets are dwindling. How are pensions
responding? By
diving into alternatives. In some respects, they're trying to match
liabilities with long-duration assets like infrastructure, but they're
also looking for diversification benefits to protect them from the next
crisis.
Problem is that so much money is flowing into alternatives
that returns will get diluted and diversification won't be there when
you need it the most. Is there a role for real estate, private equity
and infrastructure in a pension portfolio? Of course there is, but let's
not exaggerate the "diversification benefits" or "return enhancement"
of these asset classes.
The fact is that talented managers are
scarce in alternatives. You're not going to find many who can compete
with the likes of George Soros or David Bonderman. Nor should you be
aiming to find the next Soros or Bonderman.
Sometimes it's
best to stick to nuts & bolts, finding experienced managers with a
proven process. For example, the consultant I had lunch with today spoke
highly of Dodge & Cox Funds.
John Gunn, Chairman and CEO of Dodge & Cox, told him that back in
1997, they got out of technology, missing the big run-up, but also
missing the big smash-up that ensued.
They risked losing
clients but because they explained why they thought tech shares were way
overvalued, and because they invested their own money alongside their
clients, they didn't lose anyone. I particularly like this passage from
Dodge & Cox's long-term approach to investing:
We
continually focus on the long-term by asking ourselves the
hypothetical question: based on what we know now, how would we invest an “all-cash” portfolio
today assuming we could not trade for the next three to five years?
This framework forces us to reevaluate our portfolio holdings within
an ever-changing market environment, and to reaffirm our rationale for
each investment’s long-term value.
Think about that
simple question. How would you invest an all-cash portfolio today
assuming you could not trade for the next three to five years? Pensions
are shoving a good chunk of money into alternatives, taking a big gamble
on the future.
Depending on their liquidity needs, this may
prove to be a wise decision. After all, pension funds are not mutual
funds, a point underscored by David Denison, President & CEO of the
Canada Pension Plan Investment Board (CPPIB), in his April speech on what
it means to be a Long-Term Investor.
But what if they're
wrong? CPPIB and a handful of other global funds have plenty of
liquidity to keep buying these illiquid assets, but other, more mature
pension funds have to manage their liquidity more carefully.
This
is why US corporate plans have mostly shunned alternatives while public
pension plans have been gorging on them. The former need to manage
their liquidity needs more carefully while the latter are taking huge
bets, hoping they'll somehow attain the 8% actuarial return.
In
the end, alternatives or no alternatives, doesn't really matter because
the day of reckoning is fast approaching, especially for underfunded
corporate plans. Public plans will follow. There is simply no quick fix
to the pensions' debacle.
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I am not buying what you are selling. Baby boomers are done, finished, kaput....
A lot of them spent there earnings on crap. Expensive houses, cars, trips before even making it to retirement. Spend now and have nothing later. Common sense was a little too much to ask these folks.
How many kids did they have? More than they could afford is my bet.
Sure you will.
just at a much higher price :)
Yes, public sector funds are vastly underexposed to plain vanilla s&p500 assets relative to hisrtorcal norms. I would guess that the combination of underexposure to US equities and the general level of underfunding is going to be quite positive for US equities as catch-up money heads there.
Corporate profits are very high relative to GDP and pension obligations are underfunded seems like a pretty good back drop for equities.
Isn't the problem that outflows are running far ahead of performance and contributions?
I think of the current pension situation like a $100k trading account that you want to maintain at $100k while living off the profits. When you need to remove money and drop below $100k, your trading is very different than if you knew you didn't have to worry and could take a little draw down.
It just seems to me that both private and public pensions are short so much in contributions that no performance is going to make up for the huge promises made and that is the real issue: how the hell will this get resolved?
On the corporate side at least, it means that contributions are going to head higher. SInce there is plenty of free cash flow, not a real problem. So net net, earnings will take a hit but because funds are diverted into financial assets. In the aggregate the pension managers will tend to be yield hogs once it is clear that they 'have to' be in the markets. The earnings yield of the SP500 is way more attractive than a 3% ten year.
Agreed, also another advantage of US equities is that liabilities are in USD, so they don't have to worry about F/X risk.
"There is no "quick fix" to pension deficits. I had lunch today with an experienced pension consultant who told me flat out that pension deficits are going to get a lot worse, and he fears that we're heading into a full blown crisis in less than 20 years."
Leo,
It's not going to take 20 years. It is evident NOW to anyone who can add 2 + 2 and get 4.
It will be evident to pretty much everyone in less than 3 years.
Evident to the point they acknowledge to their current and future retirees that the money just ISN'T going to be there, so they better start making other plans.
It's going to be a vicious circle for a while. Unfunded pension obligation lawsuits that tie up the courts for years. An attempt by politicians to simply raise taxes to cover the unsupportable and unsustainable public pension scheme. Reduced corporate profits as a result of the above which results in a declining stock market which results in an even bigger unfunded liability.
Ugly, pure and simple.
The "wealth" to pay this debt simply does not and will not exist.
But I love the way you report on pension fund managers out there looking for the goose that lays the golden eggs.
One begins to think pension fund managers view their predicament as a simple mathematical problem to solve.
LOL.
Less than 20 years. Just because pensions are in crisis now does not mean that they will stop cutting pension payouts now. There are still plenty of assets to liquidate to meet current obligations, but it will mean the pensions will be more and more underfunded.
Poorold - I have to agree with you. My father is a Boomer, and in twenty years, I will be able to retire. The crunch is already here.
The only way this will hang on for twenty years is for all my retirement to be confiscated, and to inflate our way out of the liability.
Indeed, pension funds that are underfunded to 80% are already cripple birds for the cats.
The entire system was build on a rising market in real estate and stocks to use as collateral for real estate investments. Both are down and will need 15 years to recover.
So, serious question here. Say you're in a pension system where you're not vested for 5 years (if you leave before that, your contribution is refunded) and you're a couple months away from that date. What are your legal options for getting those contributions out? Do they all involve finding another job? That would be a pretty cruel choice, risk employment or risk pension theft. I fear that's what it'll probably come down to but I'd love to hear otherwise.
OT
BP worries about Macondo integrityhttp://www.upstreamonline.com/live/article221447.ece
July 13, 2010 20:36:32 CST
"Today I met with Secretary Chu, Marcia McNutt and other scientists and geologists as well as officials from BP and other industry representatives as we continue to prepare and review protocols for the well integrity test - including the seismic mapping run that was made around the well site this morning. As a result of these discussions, we decided that the process may benefit from additional analysis that will be performed tonight and tomorrow.
http://www.deepwaterhorizonresponse.com/go/doc/2931/780563/
http://www.nytimes.com/2010/07/14/us/14cap.html?_r=1