U.S. Pension Crisis

[HenryTo]

The more immediate effect will be felt by the workers, not the corporations as usual. That is, companies will continue to shun and dismantle DB plans going forward - thus leaving the responsibility of savings for retirement in the hands of individual workers (e.g. IBM just froze their $48 billion DB pension plan). The next effect will be felt by companies with huge pension and retiree healthcare obligations, such as GM, XOM, etc. Note that companies such as MSFT, ORCL, and INTC, etc., do not have DB pension plans. Before you invest in individual stocks, make sure that you do some research on their pension plans and understand how this will affect their balance sheets going forward.
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Pension Crisis Could Hit Balance Sheets
Saturday January 7, 5:56 pm ET
By Ellen Simon, AP Business Writer
Accounting Change Could Make Pension Crisis Hit Corporate Balance Sheets Over Next Five Years

NEW YORK (AP) -- The pension system is heading for a crisis, or maybe two.

The first is the most worrisome for workers: Too many pension plans aren't adequately funded or are already in default. The companies in the Standard & Poor's 500 with traditional pension plans need to put aside another $40 billion this year to fully fund the plans, according to S&P.

The second impending crisis is an accounting change that may make pension issues more painful for corporations. Accounting regulations for both pensions and retiree health care costs are poised to change in the next five years, in what could be the largest shift in accounting rules in more than 30 years.

"We believe this project will have a significant impact on evaluations, income and balance sheets, and will become the major issue in financial accounting over the next five years," said Howard Silverblatt, equity market analyst at Standard & Poor's.

The Financial Accounting and Standards Board, the arbiter of the nation's accounting rules, has said it will require companies to add their net pension and retiree-healthcare costs to their balance sheets within the next year. Then, over the next three or more years, the accounting methods for pensions and retiree-healthcare costs will also change.

The first change, which will move pension and retiree-healthcare costs from financial footnotes to balance sheets, could be dramatic, increasing companies' leverage and changing computed returns, book value and shareholder equity ratios. These ratios are closely watched, since many loans and bonds deals cap a company's leverage ratio. And the changes could be eye-popping. The aggregate drop in shareholder equity, for instance, will be 10 percent, Silverblatt wrote in a December report.

What about companies that freeze their pension obligations, as one in 10 pension plans insured by the federal Pension Benefit Guaranty Corp. did in 2003, according to the pension agency, and as International Business Machines Corp. announced it will do Thursday?

Freezing pensions benefits can obviously limit a company's liabilities, but unless the company defaults on its pension obligations, it can't walk away altogether.

"Pensions are legal obligations," Silverblatt said. "There's a guarantee."

If the company's pension plan defaults, the Pension Benefit Guarantee Corp., which guarantees pensions for 44 million people, will pay retirees up to $45,614 a year.

But retiree healthcare-costs are a muddier issue.

Of the companies in the S&P 500, 337 offer some kind of medical benefits for retirees. According to Silverblatt's analysis, only 282 companies provide sufficient information for estimates about their retiree-healthcare plans. Those plans are scarily underfunded: Companies would have to set aside $292 billion to meet current obligations, according to his analysis.

The state of these funds "is extremely unsettling," Silverblatt wrote.

Unlike pensions, retiree health care costs aren't a clear-cut legal obligation, unless they're part of a contract, which is the case at Ford Motor Co. and General Motors Corp., where retiree healthcare-obligations are underfunded by $94 billion.

For employers where retiree health care costs aren't part of a contract, the question is what a company's legal obligation is to fulfill the plan's promises. "If a company tells it's employers, 'You have to cover 99 percent of your premium,' is that a breach?" Silverblatt asked.

No agency will step in and pay a company's retiree-healthcare costs. In the S&P 500, retiree-healthcare plans cover 12 million employees.

The discussions around both pensions and retiree health care costs will be "lively, political and complex," Silverblatt predicted.

Pensions and retiree-healthcare costs "have moved beyond individual companies," he said. "Their importance to the global economy is now self-evident."

[rffrydr]

GM kept america rolling into bonds '11 going from 48% (this ratio got knocked by assumption of Delphi pensions) to 66%. Return of 11% for '11 amounted to $12B vs. approx $8B in "most profitable year"....Nothing is obvious
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

The big-daddy of DB, GM, went very heavy bonds 2005 which means, under ZIRP, the current marks should outlast its average corporate duration. Can't see them rolling that into much now. Equities, or risk at least, may have another wave coming.

AMR pensions, in contrast, just took the big flight to the sky. Pension Guarantee Corp has already liened assets and sits as a prominent member on the Creditors Committee in BK. (The other reason FEDs HAD to keep GM going).

[nodoodahs]

When (??) the "bond bubble" unwinds, it'll be interesting to see what happens to the pension plans.

Many insurers with DB liabilities will get to the point where they have to book an admitted asset as yields rise, if I'm not mistaken.
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[rffrydr]

Ford may have lost control of its steel hedging operations but Pensions not so bad: 14.5% 2010...and 7.7% 2011. It's all about bonds, baby.
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Merge public pensions with Social Security:

http://civfi.com/2011/11/29/merge-social-security-and-public-sector-pension-funds/#comment-1701
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

A Double "A" muni bond index may be hard to come by if this rule is implemneted
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Today is the Tomorrow you worried about Yesterday!

[HenryTo]

GASB changes for public pensions looming:

http://www.bloomberg.com/news/2011-11-22/state-pension-funds-resist-accounting-rules-that-would-magnify-liability.html

[rffrydr]

Gerry Brown has capitulated. New State employees finally getting stealth 401ks..... just when the "crisis" looks a whole lot less critical
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Today is the Tomorrow you worried about Yesterday!

[HenryTo]

Pension issues in the spotlight once again:
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Pension issues may hurt US state ratings - Moody's

By Lisa Lambert

Jan 27 (Reuters) - Some U.S. states face so much pressure to fund pensions for public employees that it could hurt their credit ratings, Moody's Investors Service said on Thursday.

As concerns grow over the financial health of many states after the 2007-2009 recession and how they will cut spending to cope, the ratings agency said its report combined pension and debt data to rank the liabilities of each state.

Connecticut, Hawaii, Illinois, Kentucky, Massachusetts, Mississippi, New Jersey and Rhode Island, along with Puerto Rico, have the largest debt-and-pension loads, Moody's found.

Nebraska and South Dakota have the lowest.

"Large and growing debt and pension burdens have been, and will continue to be, contributing factors in rating changes," Moody's said.

Lower credit ratings could raise the costs to states of borrowing money. In the past, Moody's evaluated credit risks from pensions separately from those posed by debt levels.

Issues with pensions -- which states have underfunded by at least $700 billion -- include weak returns on investments, not enough money being set aside, the impending retirement of "baby boomers" born in the late 1940s through the 1960s and Americans living longer, Moody's said.

New York, Delaware and California are often cited for large debt burdens but do not have the highest combined long-term liabilities, Moody's analyst Ted Hampton said in a statement.

"In general, states' rankings for debt and pension combined parallel their rankings for debt alone," Hampton said but added that "not all states with large debt burdens also suffer from weak pension funding."

IN THE TRILLIONS?

The $700 billion figure is a conservative estimate for how much money states will need to cover the pension promises they have made to their employees.

But $3 trillion could be nearer the mark, one study warned last year. States expect too generous a return on investments made by pension funds, said the study by Joshua Rauh of the Kellogg School of Management at Northwestern University.

Moody's also raised questions about the health of pension funds.

"Unfunded pension liabilities have grown more rapidly in recent years because of weaker-than-expected investment results, previous benefit enhancements and, in some states, failure to pay the full annual required contribution," the report said.

"Moreover, pension liabilities may be understated because of current governmental accounting standards."

Some Republicans in the U.S. Senate have embraced the idea of letting states declare bankruptcy to allow them to deal with their financial woes and renegotiate contracts with public employee unions.

Many analysts and state governors do not see bankruptcy as the solution to budget problems, fearing the option would drive up interest rates and make borrowing more expensive.

While Republicans are divided on the idea, which has little chance of clearing Congress, even talk of bankruptcy has caused unease in the $2.8 trillion municipal bond market.

[HenryTo]

Ongoing theme--good Christmas article?

http://www.theatlantic.com/business/archive/2010/12/crisis-in-the-states/67566/

[nodoodahs]

http://www.towerswatson.com/united-states/newsletters/insider/2761
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[rffrydr]

[nodoodahs]

http://www.pyramis.com/downloads/us_public_overview_db_survey_2010.pdf

http://www.pyramis.com/downloads/us_corporate_overview_db_survey_2010.pdf
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[rffrydr]

The long long road to yield and the demise of mean-reversion in the dividend gap:

http://ftalphaville.ft.com/blog/2010/09/17/345826/desperately-seeking-income/


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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Where there's a will there's a way:

Tom Graff
California bankruptcy law change
4/13/2010 11:31 AM EDT