| US Pension Plan Performance
2007-2008 |
| |
 |
| |
| If 2007 was a roller-coaster ride, 2008 has started as a nosedive |
| |
The year 2007 was a year of tremendous
volatility in the financial markets. Credit
markets were thrown into crisis due to
the collapse of the sub-prime mortgage
market in the United States. Stock markets also
felt shock waves associated with sub-prime
write-downs, with the S&P 500 registering
daily movements of one percent or more on 65
of the 251 trading days in 2007.
Despite the volatility observed throughout
the year, Hewitt's Global Risk Services
estimates its Pension Risk Tracker ended the
year funded only slightly worse than it started
the year, seeing the deficit position of $40
billion increase to a position of $46 billion, and
closing at 96.7 percent funded.
This slight decline is primarily attributable
to asset returns of 2.3 percent generally not
meeting expectations, offset by a decline
in pension obligations due to increases in
corporate bond yields during 2007.
The first quarter of 2008 showed no
signs of a slowdown, as increased levels
of volatility were coupled with a continued
overall downward trend in funded position.
As of March 31, 2008, the funded ratio had
declined to 90.7 percent, a 6.0 percent decline,
representing a loss of $82 billion. |
|
2007 was a roller-coaster ride
The relatively mild change in position from
beginning to end of year masks the rollercoaster
ride pension plans took plan sponsors
on during 2007. During the first half of 2007,
strong equity market performance lifted
plan asset values while increasing corporate
bond yields had a favorable impact on plan
liabilities.
That proved to be the calm before the storm,
as tremendous volatility was observed starting
in mid-summer and continuing throughout the
end of the year, largely attributable to the credit
crisis that resulted from the failure of the U.S.
sub-prime mortgage market. The credit crisis
spurred significant market reaction with sharp
declines in equity markets, as well as a flight to
quality in the bond market, as investors shifted
capital into U.S. Treasuries and other higher
quality investments.
The deficit position bottomed out at $109
billion on March 13, and peaked at a $149
billion surplus position on September 20,
before settling at the estimated deficit position
of $46 billion on December 31. In fact, in the
two-week period starting September 10, the
aggregate position went from a deficit of $21
billion, up to the aforementioned surplus of
$149 billion, and then back down to a surplus
of only $34 billion. Included in that period was
a one-day decline in funded position of nearly
$100 billion, or 8 percent. |
| |
|
|
|
|
| |
2008 has been a nosedive
If 2007 was a roller-coaster ride, 2008 has
started as a nosedive. Continued falling
equity prices over the first quarter generated
a significant decline in funded position of the
aggregate pension plan for the Fortune 500.
In the bond market credit spreads continued
to widen so that the losses in plan assets due
to declining equity markets were offset by a
reduction in plan liabilities. If credit spreads
were to tighten again without a corresponding
rise in risk free rates, pension liabilities will
spike upwards, further eroding the funded
position of US pension plans. No matter which
direction things go in the coming months, the
heightened levels of volatility is something that
cannot be ignored. |
|
Accounting numbers mask true volatility?
It is interesting to note that the credit crisis had
a modest impact on the average prices, and
therefore yields, of high-quality corporate bonds,
which are used in setting discount rates for
measuring and reporting obligations in company
accounts. If anything, yields in this segment of
the market increased, generating a favorable
impact on accounting liabilities. however,
the flight to quality inflated prices and drove
down yields in the Treasury market, so that the
economic value of liabilities (the cost at which
liabilities could effectively be settled) increased
significantly during 2007. The cost of settling
obligations, through plan termination or pension
plan buyout, as well as a number of other
risk management techniques, are likely to be
considerably more expensive now than they were
six months ago or even at the start of the year.
When the dust has settled, this period may well
be perceived as a year of missed opportunity for
implementing risk-hedging strategies. |
|
The Pension Risk Tracker
represents the aggregate
funded status of the
pension plans sponsored by the
FORTUNE 500 companies.
It is updated daily at
Hewitt Pension Risk Tracker
.
|
|
| |
| |
| |
|
|
|
|
| |
| |
|
|
|
|
|
| |
|
|
| |
Hewitt Quarterly Asia Pacific
is made possible through the combined skills and experience of Hewitt consultants from across the Asia-Pacific region.
For further information please contact:
Hewitt Associates
2601-05 Shell Tower
Times Square
Causeway Bay
Hong Kong
Tel: (852) 2877-8600
Fax: (852) 2877-2701
editor-hqap@hewitt.com
|
|
| |
|
