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Huge Shortfall on US Corporations Pension Deficits (SP1500) : Future drag on Earnings ?

( AICEO, News to Used, Mercer, Reuters, Fox Business, Pension Risk Matters, Worldwide Financier )

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The Situation



One of the huge consequence of the Federal Reserve actions since the financial crisis by bringing interest rates at historic low levels ​has been the exploding pension liabilites. And that problem has been aggavated because the Federal Reserve has already indicated its intent to keep rates low for a long time. And that brang corporate bond yields and discount rates ( used to calculate pension fund liabilities ) at extremely low levels, an worsen by the way the pension problems.

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​ The Great Recession, which decimated retirement assets, played a big role in building this lesser-known cliff. But many corporations could have avoided the problem by shoring up these funds during the boom years. Instead, they siphoned pension assets for other profit-boosting purposes. When the pension deficits started to balloon, many corporations responded by slashing back their benefit programs.



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Discount Rates

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Low interest rates are driving the surge in pension fund deficits. As Treasury yields drop, so too does the percentage at which the funds can discount future liabilities when calculating their size on a net present-value basis.



The discount rate fell to a historic year-end low in 2011 at 4.80%. That rate was around 6.5% in 2008.



Given the record-low discount rates, pension deficits will not correct themselves unless corporations put huge contribution to their funds or the performaance of pension funds







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Valuation of Pension Deficits ( pension plans among members of Standard & Poor’s 1500 )





Date of Valuation Assets Liabilities Deficit

​ Trillion $ Trillion $ Trillion $



​31 December 2007 1.66 1.60 -0.06

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​31 December 2008 1.21 1.62 0.41



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31 December 2012 1.59 2.14 0.55

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So according valuation by Mercer, the deficit of the pension plans among members of Standard & Poor’s 1500 at the end of 2012 is

​0.55 trillion $, a huge gap compare to the surplus of .06 trillion $ at the end of 2007.

And for US Big Corporations, the situation is not better as the shortfall came from the liability side of the balance sheet, as low interest rates created an estimated $347 billion increase in the plans’ pension benefit obligations at the end of 2012. That is better than the $386 billion gap recorded at the end of 2011, but the two years represent the worst deficits ever, according to J.P. Morgan Asset Management.

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The firm estimates that companies now hold only $81 of every $100 promised to pensioners.



The combination of low rates and longer life spans has made it tough for pension plans to keep pace. Between 2009 and 2012, companies in the Russell 3000-stock index have added $1 trillion in assets to their pension plans through investment returns and contributions, but their overall deficit still increased to an estimated $441 billion from $392 billion over that period, according to data from J.P. Morgan Asset Management. ( See graph below )

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And the situation in 2013 for corporate pension funds will not improve that much as trouble spots are unlikely to disappear any time soon, putting continued pressure on the size of liabilities.



Concerns will take the form of financial assets performance, funded status volatility, unfavorable changes in the index used to value pension liabilities and longevity assumptions that increase liability values, employers continue to explore de-risking transactions such as offering lump sums and buyouts.







Concerns : US companies using debt to cover pension shortfalls

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​Faced with ballooning deficits in their pension funds, US companies are increasingly turning to the bond market to help plug the gap, taking advantage of super-low borrowing costs.



The 100 biggest US pension funds had a combined deficit of $326.8bn last year, pushing up charges to earnings to an all-time high of $38.3bn, according to consulting firm Milliman.



That figure is expected to rise to as much as $54bn in 2012, Milliman said.



To address their pension liabilities, companies are set to make record contributions into pension funds this year -- and many are turning to the debt capital markets to raise the cash.



"We have already seen a number of companies access the debt markets in recent months to finance their pension needs," said Andrew Karp, head of investment-grade debt syndicate at Bank of America Merrill Lynch.



"It's definitely something that we have identified as a potential use of proceeds this year," he said.

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