http://www.zerohedge.com/news/zirp-strikes-again-pension-under-funding-sp-500-companies-hits-record
ZIRP Strikes Again: Pension Under-Funding For S&P 500 Companies Hits Record
The public pension and retirement 'schemes' are in considerable trouble (as we noted here and here) and now, according to a recent S&P study, private companies are at record levels of pension under-funding. Fiscal 2011 shows that the under-funded level for S&P 500 companies' defined pensions reached an epic $354.7 billion - an increase of over $100 billion from 2010 and surpassing the 2008 record of $308.4 billion - and OPEB under-funding reached $223.4 billion. An aggregate $578 billion or 29.5% underfunding or the $1.96 trillion in obligations is increasing as the rates of return are reduced thanks to yet more unintended consequences of the Fed's ZIRP and perhaps most worrying is there comment that "The American dream of a golden retirement for baby boomers is quickly dissipating; plans have been reduced and the burden shifted with future retirees needing to save more for their retirement. For many baby-boomers it may already be too late to safely build-up assets, outside of working longer or living more frugally in retirement."
S&P 500 Pension Underfunding Compared to Market Levels
http://globaleconomicanalysis.blogspot.com/2012/07/calpers-pension-plan-reports-1-growth.html
Tuesday, July 17, 2012 1:32 AM
Calpers Pension Plan Reports 1% Return; Stunning "What If" Charts at Various Compound Annualized Rates-of-Return Going Forward
The California Public Employees' Retirement System (CalPERS) manages pension and health benefits for more than 1.6 million California public employees, retirees, and their families. Its pension plan assumes 7.5% annual growth.
For fiscal year ending 2012 CalPERS Reports Preliminary Performance of 1 Percent.
How Underfunded is CalPERS?Bear in mind that CalPERS was massively underfunded before this report. How underfunded?
For fiscal year ending 2012 CalPERS Reports Preliminary Performance of 1 Percent.
How Underfunded is CalPERS?Bear in mind that CalPERS was massively underfunded before this report. How underfunded?
Good question. Please consider CalPERS Lies About Equity Returns
CalPERS is both corrupt and incompetent. If it were a private firm, the lies about return on investments would send executives to jail and billions in lawsuits filed.
“The California Public Employees’ Retirement System (CalPERS) is the biggest public pension in the country. It is also deeply underfunded. Depending on the measure used, they have just 55-75% of money needed for future expenses while 80% is considered the minimum to be safe. Their return is currently less than 99% of big pension funds.
On March 12, CalPERS voted to lower their expected return from 7.75% to 7.5%, ignoring the advice of their own chief actuary that it should be 7.25%. More than a few investment professionals consider a projected rate of 7.75% to be unrealistically high in these times and question whether 7.25% is realistic.”
Now we know that CalPERS is in the lowest 1% of all pension funds—what else would you expect from a California government agency?
"What If" Charts at Various Compounded Rates
Let's pretend that CalPERS is 100% funded. Already that is one hell of a pretend job, but assuming so, what will CalPERS underfunding look like at various compound plan performance rates?
CalPERS currently has $233 billion in assets.
CalPERS assumes 7.5% annual growth.
What if CalPERS only returns 5%? or 2.5%?
CalPERS Assets Compounded at 7.5%, 5.0%, 2.5%
CalPERS Underfunding at 5.0% and 2.5%
Let's pretend that CalPERS is 100% funded. Already that is one hell of a pretend job, but assuming so, what will CalPERS underfunding look like at various compound plan performance rates?
CalPERS currently has $233 billion in assets.
CalPERS assumes 7.5% annual growth.
What if CalPERS only returns 5%? or 2.5%?
In the following charts the left scale is in billions of dollars.
The bottom scale is in years.
Base assumption is CalPERS is currently fully funded (which it clearly is not)CalPERS Assets Compounded at 7.5%, 5.0%, 2.5%
CalPERS Underfunding at 5.0% and 2.5%
I believe annualized returns for the next 10 years will be between 0% and 5% at most. I highly doubt they will be as good as 5%.
With that in mind, let's take a closer look at projections for the next 10 years.
CalPERS 10-Year Asset Growth Projections
CalPERS 10-Year Projected Underfunding at 5.0% and 2.5%
Once again the above charts assume pension plans are fully funded and they ignore effects of drawdowns if exceptionally low returns happen.
Negative Returns for 10 Years?
I have made the case that Negative Annualized Stock Market Returns for the Next 10 Years or Longer are Far More Likely Than You Think.For follow-up posts please consider
- Anatomy of Bubbles; Negative Returns for a Decade Revisited; Is Gold in a Bubble?
- Another "Lost Decade" Coming Up; Boomer Retirement Headwinds; P/E Expansion and Contraction Demographic Model
- Misty Water-Colored Memories, Dirt-Cheap Stocks, and Patient Opportunism
Assume the Best
Even if you assume negative or near-zero returns are impossible (ignoring Japan for the last 20 years and the S&P 500 since the 2000 peak) clearly low cumulative annual returns over extended periods are possible.
Given boomer demographics, downsizing, student debt suppressing housing, etc., why shouldn't growth be anemic for quite some time?
Given that pension plans are typically heavily invested in bonds, and the current 10-year treasury rate is 1.48%, it is going to be damn difficult (most likely impossible) for pension plans to come close to the annualized projection of 7.5% made by CalPERS and others.
Furthermore, the more risk pension plans take attempting to meet near-impossible goals, the more likely it is that they will blow sky high in taking that risk.
All things considered, especially with pension plan philosophy to be 100% invested in something 100% of the time, I believe pension plans will not avoid the next huge drawdown, with possibly devastating consequences.However, let's for the moment assume positive annual growth of 2.5% to 5%. Let's further assume plans are not currently underfunded. Finally, let's assume pension plans avoid the next big drawdown.
Even with those optimistic assumptions (wildly optimistic as pertains to CalPERS being currently fully funded), CalPERS still rates to be deep in the hole 10 years from today.
* * *
http://www.zerohedge.com/news/calpers-generates-1-return-misses-discount-rate-target-87
Calpers Generates 1% Return, Misses Discount Rate Target By 87%
"Thank you ZIRP, may we have another." This is what the 1.6 million workers who have invested their retirement money with America's largest pension fund, California's CALPERS, may want to ask Chairman Ben following the firm's just announced results for Fiscal 2012 (ended June 30). The end result: +1% nominal return, which means a negative real return. And this is even including the now traditional end of June ramp which this year came courtesy of the now largely irrelevant European summit, which nonetheless ramped stocks and likely meant the difference for Calpers between positive and negative on the year! Sadly just one "another" year would not be enough, but a whopping 7 more would be needed, because as is well known, for all actuarial purposes Calpers, as well as the bulk of US pension funds, use a 7.5% discount rate. In other words, Calpers missed the minimum return it needs to not require overfunding by, oh... 87%. Here is Calper's Mea Culpa: "CalPERS 1 percent return is below the fund’s discount rate of 7.5 percent, a long-term hurdle lowered recently in response to a steady decline in inflation and as part of CalPERS routine evaluation of economic assumptions." At this rate, courtesy of ZIRP and the destruction of equities as an asset class, until the 2s30s is flat, and we have terminal wheelbarrow lift off, Calpers will no choice but to keep revising lower and lower until its discount rate is negative in line with the imminent advent of NIRP. Good luck with those actuarial tables with a negative discount rate.
From Calpers:
The California Public Employees’ Retirement System (CalPERS) today reported a 1 percent return on investments for the 12 months that ended June 30, 2012, falling short of its benchmark that returned 1.7 percent. CalPERS assets at the end of the fiscal year stood at more than $233 billion.The small gain – despite continued volatility in world markets and economies – was helped by improved performance of CalPERS real estate investments. Investments in income-generating properties like office, industrial and retail assets returned approximately 15.9 percent, outperforming the pension fund’s real estate benchmark by more than 3 percent.
CalPERS performance was negatively impacted by significant allocations to U.S. and international public equities.
"The last twelve months were a challenging period for all investors as the ongoing European debt crisis and slowing global economic growth increased market volatility and reduced equity returns,” said Joe Dear, CalPERS Chief Investment Officer. “It’s a clear reminder that we must remain focused on performance, risk and internal controls in today’s financial environment.”CalPERS 1 percent return is below the fund’s discount rate of 7.5 percent, a long-term hurdle lowered recently in response to a steady decline in inflation and as part of CalPERS routine evaluation of economic assumptions. CalPERS 20-year investment return is 7.7 percent.
“It’s important to remember that CalPERS is a long-term investor and one year of performance should not be interpreted as a signal about our ability to achieve our investment goals over the long-term,” said Henry Jones, Chair of CalPERS Investment Committee.
And here is why equities are pretty much finished as an asset class for pension funds:Today’s announcement includes asset class performance gains as follows:
Finally, here is where Calpers affiliates willnot be happy:
Employer contribution rates that use CalPERS 2011-12 fiscal year investment performance will be calculated based on audited figures and will be reflected in contribution levels for the State of California in FY 2013-14 and for contracting cities, counties and special districts in FY 2014-15.Advance warning: contribution rates are going up, up, up.
SUNDAY, JULY 15, 2012
Low rates pushing pensions deeper into underfunded territory; liability "smoothing" goes global
The corporate pension lobby is increasingly energized to have the US Congress approve the 25-year "smoothing" for pensions. With interest rates falling, defined benefits corporate pensions are once again becoming severely underfunded.
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| Source: JPMorgan |
Increasing the discount rate would lower the net present value of pension liabilities making them look less underfunded. The assets however will be growing at the current extremely low rate of return and will likely be insufficient to meet pension obligations in the future.
NCPA: - Private corporations are asking Congress to change how they calculate their annual pension contributions, which could create a huge unfunded liability for taxpayers, say Jason J. Fichtner and Eileen Norcross, senior research fellows with the Mercatus Center.Not surprisingly this lobbying effort is not limited to the US.
The law requires corporate plans to measure their liabilities, and determine annual contributions to fund them, using the rate of return on corporate bonds -- the discount rate. Now, corporations are lobbying for Congress to allow them to increase the discount rate. This allows accountants to assume better investment performance, setting aside fewer dollars for future pension obligations.
- The provision in the Senate-passed version of the transportation bill currently under consideration in the House would allow corporations to use a 25 year average rate as opposed to the current 2 year average.
- This would increase the current discount rate from the 4 percent range to roughly 6 percent.
- Since liabilities are sensitive to discount rate assumptions, the plan's liability will change roughly 15 percent for every one percentage point change in the discount rate.
- For example, Boeing reports that a mere quarter of a point increase in the discount rate could cut its pension liability by $1.7 billion.
FT: - Pressure is growing on the UK government and Pensions Regulator to follow their US and European counterparts and give corporate pension funds more flexibility in how they calculate their level of funding for setting company contributions.
Accounting rules in many countries require pension funds to mark their liabilities to market by discounting them at current bond rates. The low level of interest rates has put pressure on scheme funding by inflating liabilities, and authorities in some countries have decided to help scheme sponsors by moving away from the mark-to-market approach.
Governments in the US and the Netherlands are extending “smoothing”, which allows funds to discount their liabilities with an average rate over a set time period. Elsewhere, Sweden has put a lower limit on rates, and Denmark has set a higher rate for long-term liabilitiesOut of sight, out of mind.
and.....
http://soberlook.com/2012/07/demand-for-investment-grade-corporate.html?utm_source=BP_recent
SUNDAY, JULY 15, 2012
Demand for investment grade corporate paper accelerates
Investors' love affair with investment grade corporate bonds is heating up. LQD (iShares iBoxx Investment Grade Corporate Bond Fund), the largest investment grade ETF, has returned nearly 12% year over year (about 6% better than the S&P500 over the same period).
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| LQD total return The share count (a measure of fund inflows into ETFs) for LQD is once again hitting new records, as the ETF continues to trade at premium to NAV (currently some 50bp). The AUM for this ETF is now almost $23 billion, making BlackRock very happy. This is about $35 MM in fees a year just for this one index ETF - no investment decisions required (just follow the iBoxx IG index).
And it's not only the corporate bond ETFs that are growing rapidly. Flows into investment grade mutual funds are on fire. |
 |
| Source: JPMorgan |
Seeing this demand, companies out there are tapping historically low financing rates.
Bloomberg: - Companies worldwide are selling bonds at the second-fastest pace on record with investors seeing the debt as an alternative to traditional havens such as government securities that are now paying negative yields.
Anheuser-Busch InBev NV, the world’s biggest brewer, and Mexico City-based America Movil SAB de CV lead sales this week of at least $74.2 billion,bringing this year’s total to $2.08 trillion, according to data compiled by Bloomberg. That’s second only to the $2.37 trillion issued at this point in 2009.
Investors are seeking corporate bonds with investment-grade yields that average a record-low 3.13 percent, or 2.13 percentage points more than government securities, and balance sheets that hold near record amounts of cash, according to Bank of America Merrill Lynch index data. At the same time, stocks and commodities are losing money as Europe’s debt turmoil spreads and the global economy falters.Investment grade bonds are becoming the "new treasuries". That is until some investment grade company runs into trouble.
“For an increasing number of investors, corporate bonds are serving as de facto substitutes for Treasury securities, but with higher yields,” Edward Marrinan, macro credit strategist at Royal Bank of Scotland Plc in Stamford, Connecticut, said in a telephone interview.
Note: These low corporate yields are what's driving pensions to become severely underfunded (pensions use high grade corporate yields to discount liabilities), triggering the "big smoothing" lobby effort.
The other option here is to put off taking Social Security benefits as long as you can.
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