Thursday, October 30, 2008

At Least Our Pensions Are Safe, Right?

The markets wound higher on bad news ---- Oh, I don't know why, but huge jumps in government spending saved the GDP number and that somehow rallied stocks.

Again most of the market moves occurred in the last 15 minutes. It feels like were heading toward 0% interest which is going to really squeeze banks further, but more on that another day.

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Pension funds have been hit hard by the buy and hold strategy. While the impact on current retirees is likely to be limited and pensions themselves are likely to survive intact, the impact on corporate earnings might be substantial.

Pension fund gap hits $100bn

US companies will need to inject more than $100bn into their pension funds to cover market losses, putting them in a cash squeeze at a time when it is difficult to raise money.

The cash payment, estimated by several pension industry executives, would be spread over this financial year and next year.

Companies' pension fund losses - running at an estimated 20 per cent in the year to date - also are expected to alter earnings this year, partly because of accounting changes.

The 700 largest corporate plans were more than 100 per cent funded at the end of last year, but as of last week that had fallen to about 83 per cent, according to estimates by Mercer, a pension consultant.

"Earnings will be impacted significantly. The 2008 year-end balance sheet will reflect that."

The one caveat is that since pension fund accounting is fairly complex, many firms can avoid the hit to earnings by simply changing some assumptions in their formulas. The most common change is to change the assumed annual return on investments (this was a common move in 2000-2002). To really understand the impact on earnings we're going to have to dig deep into the 100+ page annual reports next April - what a joy!

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