Market freefall takes huge bite out of corporate pension plans By Mark Bruno and _Tom Henderson_ (mailto:[EMAIL PROTECTED]) ____________________________________ (http://oascentral.crainsdetroit.com/RealMedia/ads/click_nx.ads/www.detroitbusiness.com/index/[EMAIL PROTECTED],Middle,TopLeft,x01,x02,x03,Bottom!Middle?) ____________________________________ Less than a year after most companies were operating with comfortable pension surpluses, many are now staring at the strong possibility of ending 2008 with their defined benefit plans well in the red - an outcome that would require corporations to cough up considerable chunks of cash, seemingly at the worst possible time, to plug holes in their pensions' funding levels.
Large corporate pension plans appear as if they've taken an astounding blow this month, losing an estimated $100 billion of their combined funded status over just five days. But the hit won't be nearly as bad as it might seem, said Sam Valenti III, president of Masco Capital Corp., the investment subsidiary of Masco Corp. Valenti said stocks likely will rebound by the end of the year, when pension funds do their accounting, but even if they remain at current lows, paper losses from stock investments won't translate into dollar-for-dollar replacements from working capital. “It's complicated math, and you make it up over a period of years. It's not as dramatic as it seems,” he said. “The real drama is if you are an auto dealer and you can't finance a sale.” “Thankfully, actuaries take a very long view to smoothing the ups and downs of the market,” said David Sowerby, portfolio manager and chief market analyst for Bloomfield Hills-based Loomis Sayles & Co. L.P., who is also chairman of the investment advisory committee for the State of Michigan Retirement Systems. “As frustrating as these bear markets are, here's why you design a strong allocation and investment policy that seeks diversification and is aligned with your needs.” Sowerby said the state's fund, which has fallen below $60 billion, is almost 60 percent invested in public stocks. “You don't get too giddy in bull markets or act irrationally near the bottom of bear markets. ... These are the times when you prove your worth,” he said. Collectively, the 1,500 largest U.S. corporations had $1.66 trillion in defined-benefit assets at the end of last year to cover $1.6 trillion in pension liabilities, an ideal balance, according to data from pension consultants at New York City-based Mercer Human Resource Consulting. But these plans, on average, have about two-thirds of their assets invested in the equity markets, and by the end of last month were only 97 percent funded. It's a major hit by any stretch, but it pales in comparison to the most recent losses these plans appear to have just sustained, courtesy of one extremely Red October. As the broad equity markets were slammed over the first five days of the month - the Dow Jones Wilshire 5000 Index declined more than 15 percent, its worst five-day return since October 1987 - corporate pension funds' assets shrank, while their liabilities remained largely unchanged, said Adrian Hartshorn, a consultant in Mercer's financial strategies group. That combination likely means that, collectively, the defined benefit plans at the 1,500 largest U.S. corporations are now only about 90 percent funded. Now, when companies do their required annual actuarial evaluations at year-end, it appears almost certain that a number of large corporations will close their books with underfunded plans, said John Erhardt, principal and consulting actuary for Brookfield, Wis.-based Milliman USA. As part of the Pension Protection Act of 2006, companies with underfunded plans are now forced to make more aggressive contributions in order to get their pensions 100 percent fully funded. The rules also assigned a specific seven-year timetable in which a company must amortize payments to make up for the shortfall. The extent to which large corporations' pension funds will be damaged will vary greatly, and will depend, of course, on the way their assets are invested. Some, such as General Motors Corp., have made major moves to trim their exposure to equities and insulate their portfolios from volatility. GM, the largest corporate pension plan, had only 30 percent of its $117 billion in assets invested in equities at the end of last year, with the remainder invested in fixed-income and alternative investments. In 2005, the company had almost half its pension assets invested in the equity markets. This message has been scanned for malware by SurfControl plc. www.surfcontrol.com _______________________________________________ Marxism-Thaxis mailing list [email protected] To change your options or unsubscribe go to: http://lists.econ.utah.edu/mailman/listinfo/marxism-thaxis
