According to Standard & Poor’s Index Services data and estimates, S&P 500 pension funds face massive losses in 2008 and potentially post record setting underfunding.
S&P 500 defined benefit plans as a group was overfunded by $63.4 billion in 2007, their first surplus year since 2001. The 2008 year-to-date equity declines of approximately 41% for the S&P 500 and 44% for the S&P Global Broad Market Index are expected to drastically reduce the equity value held by U.S. plans (approximately $780 billion) and non U.S. plans (approximately $140 billion).
Standard & Poor’s Index Services also expects discounted pension liabilities to fall slightly due to the higher discount rate used in their computation. The result is that pension funds will be underfunded on an aggregate basis by $257 billion (17.9%), easily surpassing the record $219 billion under funding set in 2002.
The smoothing, or averaging of historical returns, essentially flattens the pension performance over several years — preventing strong swings in funding. In extreme markets, such as this year, it will reduce reported losses (as they are spread over several years), and similar to 2002, could actually permit some funds to report gains for 2008.
“Standard & Poor’s Index Services expects that many issues will be required to add funding to maintain minimum requirements, and that more issues will voluntarily add funding to take advantage of pension smoothing accounting,” says Howard Silverblatt, Senior Index Analyst and the author of the research, Standard & Poor’s.
“In reality, any pension fund manager that came remotely close to breaking even in 2008 is quietly celebrating that they survived one of the worst markets in the modern era,” continues Silverblatt.
L.D.