Findley Davies - Consultants in Human Resources

Findley Davies has developed the Pension Indicator^TM to allow employers to mitigate their risk exposure by monitoring the estimated changes to their pension plan’s funded status as it is reported for financial statement purposes under U.S. GAAP. The three tables below provide the percentage change in the funded level of the plan: year-to-date, month-over-month, and 12-month change as of December 31, 2011, based on the investment mix and plan type.

The Pension Indicator^TM is updated on a monthly basis to reflect changing marketing conditions, so return regularly for the most recent values and updated commentary.

Calendar Year-to-Date

Month-over-Month

12-Month Change 

Commentary

The collective groan you hear is the sound of controllers and other financial officers of organizations with pension plans saying, “Not again!” Yes, the bond market had a fairly good year. Yet, while the stock market finished flat to slightly ahead (depending on which sector and index you are looking at), the markets were no match for how the measure of liabilities shot up in 2011. 

We’ll concede that percentage-wise, the drop for 2011 was not as bad as what happened during 2008. However, the market started 2011 from a lower point as well. The net effect of a good year in 2009, plus a relatively neutral year in 2010, followed by this funded status relapse during 2011, may result in some of the lowest funded ratios for any calendar year-end - and that’s including the 2008 year-end. Only where large employer contributions were made, will this not be the worst impact from pension plans on year-end balance sheets.

In addition, GAAP accounting has done everything over the last few years in the name of “transparency.” The short-sighted use of spot rates for liabilities for payments that will be paid out over the next 30-plus years seems ill-conceived, but as the saying goes, “It is what it is.” While there is talk of moving to the international standard which takes the year-to-year gyrations out of the core pension expense, it is likely several years off before this convergence will take place.

Here’s to hoping that 2012 is the year when the famous last words, “Interest rates have nowhere to go but up!” actually holds true. If you have any comments or suggestions, we welcome your feedback.

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About the Findley Davies Pension Indicator^TM

Findley Davies developed this indicator to allow employers to monitor the estimated changes to their pension plan’s funded status as it is reported for financial statement purposes under U.S. GAAP. 

Example 1: If the market value of the pension plan’s assets as of December 31, previous year, was $90 million and the projected benefit obligation as of the same date, December 31, previous year, was $100 million, the funded plan percentage was 90%. If the year-to-date Pension Indicator^TM is +6%, the current estimated funded plan percentage would now be 106% of 90%, or 95.4%*. Similarly, if the year-to-date Pension Indicator^TM is -­7%, the current estimated funded plan percentage would be 93% of 90%, or 83.7%*.

Example 2: Assuming that the funded plan percentage as of the last day of the previous month was estimated to be 90%, then if the monthly Pension Indicator^TM is +2%, the current estimated funded plan percentage would now be 102% of 90%, or 91.8%*. Similarly, if the monthly Pension Indicator^TM is ­-1%, the current estimated funded plan percentage would be 99% of 90%, or 89.1%*.

* All other factors and variables holding steady.

The Findley Davies Pension Indicator^TM is the property of Findley Davies, Inc. Use of the Pension Indicator^TM is not, however, restricted if proper attribution to Findley Davies is made. Its use should be limited for estimation purposes only and Findley Davies does not assume any liability for its use or misuse by any other person not authorized by and acting on behalf of the firm.

Additional Information and Disclaimers

The development of the liabilities is done using a yield curve analysis. Benefits due to be paid in the next 12-24 months are matched with high-quality bonds of the same duration. Each 12-month period is likewise matched up with similarly-situated bonds. Payments from the pension plan 30 years and beyond are all discounted using 30-year bond yields. Each pension plan has its own unique cash flow and can differ significantly from the results presented herein. This e-mail address is being protected from spambots. You need JavaScript enabled to view it if you are interested in an analysis of your pension or retiree medical plan.

The asset return is developed using total return statistics from readily-available indicators for both equity and fixed income instruments. A weighted-average of the equity and fixed income returns are then used for the differing ratios presented. Due to the numerous different investment choices/styles/managers, your plan’s performance may differ significantly from the results presented here.

Contributions to the pension plan are assumed to be equal to the benefits being earned in the current year. As such, the funded level of the plan is unaffected by this factor in the analysis. The funded status would, of course, be impacted by higher or lower actual contribution amounts.

The cash flows from the non-cash balance plans assume no lump sum payments are available to participants. The cash balance plan assumes 100% of participants will elect a lump sum benefit at termination of employment. 

Analysis for the cash balance plan does not assume a change in the underlying interest crediting rate for employees. Analysis of spreads between corporate bonds and U.S. Treasuries is beyond the scope of this indicator. This e-mail address is being protected from spambots. You need JavaScript enabled to view it if you would like further analysis of your cash balance plan.

This indicator is an informative tool to help analyze the change in funded status for pension plans. However, the Other Comprehensive Income (OCI) line item is also affected to the extent actual return differs from expected return used in the development of pension expense. If you have any questions on the change in your OCI as a result of market conditions, This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

© 2012  Findley Davies, Inc.