THESIS 2015 UPDATE: PUBLIC vs PRIVATE PENSION ASSUMPTIONS IS MINIMALLY A COMING $3.5T TAX PROBLEM
We spend a lot of time writing about public pensions because the aggregate underfunding levels, $3 - $5 trillion on the low end, are simply staggering and at some point they will be realized for
- The ponzi schemes that they are, and
- The systemic risk they represent to the global financial system.
Until then we'll just keep shouting into the abyss.
And while we don't spend as much time on corporate pensions, for some companies their underfunded defined benefit obligations will almost certainly result in their demise at some point in the future.
As a recent study from Pensions & Investments points out,
- the top 100 corporate pensions were underfunded by over $250 billion at the end of 2016.
- Moreover, despite a 250% S&P rally from the 2009 lows, corporate pensions have only managed to improve their funded status from 79.1% in 2008 to 84.5% today.
The aggregate funding deficit for P&I's universe rose to $258 billion as of Dec. 31, up 5.3% from a deficit of $245 billion the previous year.
The average funding ratio of the 100 largest U.S. corporate defined benefit plans continued to slide in 2016, dropping to 84.5% from 85.1% at the end of 2015 and 85.7% at the end of 2014, Pensions & Investments' annual analysis of corporate SEC filings shows.
“The big story on DB plan funding is how little it's recovered from the big downturn in the recession,” said Alan Glickstein, Dallas-based senior retirement consultant at Willis Towers Watson PLC.
The average funding ratio for P&I's universe was 108.6% at the end of 2007, which plunged to 79.1% at the end of 2008 at the peak of the financial crisis.
Meanwhile, the bottom 10 corporate pension funds alone, as ranked by funded percentage, were underfunded by nearly $70 billion.
And while a $250 billion funding shortfall is significant, at least investors can take some solace in the fact that corporate pensions, unlike their public counterparts, are using somewhat reasonable discount rates to calculate the present value of their future funding obligations. According to P&I, the average corporate pension used a discount rate of 4.39% in 2016...
The average discount rate used to calculate plan liabilities began to decline in 2008, dropping to 4.05% in 2012 from 6.45% in 2008. The average discount rate used by the plans in P&I's universe was 4.39% in both 2015 and 2016.
...compared to 7.5% for several public pensions like CalPERS in California.
But, it's no big deal...if public pensions lower their discount rates to force them inline with private corporate assumptions it would only increase net underfundings by $3.5 trillion...no biggie....taxpayers can definitely absorb that.