Sunday, June 7, 2009
"Unless you are drawing one, pensions can be a headache, and not just for the employees paying wages into them. ... Soon, the requirements of the 2006 Pension Protection Act kick in. Investors used to panicking about pensions in a downturn and forgetting about them in an upturn will need to adjust. Under changes being phased in through 2011, companies will have to close any funding gap on certain pension plans by 2018. ... Surely, however, by 2018 a renewed bull market could do the heavy lifting on repairing pension plans. ... Plan assets require compound annual growth of 12.7% over the next seven years to get back in line with their underlying assumptions. The S&P 500-stock index's annual total return since inception is 9.6%. ... There is another angle to consider: The arbitrage opportunity between diverting cash to pension top-up payments or share buybacks. The latter are used to cosmetically enhance earnings per share. ... Under pension accounting, top-up contributions earn a return in line with the plan's assumptions for the following year, reducing operating costs. In addition, they incur a deferred-tax benefit", my emphasis, Liam Denning at the WSJ, 12 May 2009.
Pension accounting is a disaster. Current pension accounting obscures the problem of underfunded pension plans.