Monday, January 24, 2005

Higher Rates (please!)

The average defined benefit pension plan return probably exceeded the average actuarial assumed rate of return for the second calendar year in a row. Despite that good news, Ron Ryan calculates that assets under-performed liabilities for the year by over –.84% using his model assumptions. Now, Ron may not be a particularly skilled asset allocator(... an asset liability expert with 5% cash and 5% international in a model pension portfolio???), since his model portfolio only returned 8.9% in 2004. However, the point remains that the change in liability valuations, biased to historical rates, probably matched positive asset returns for 2004. This leaves pension plans open to another year of sizable contributions. According to the WSJ, the average S&p500 pension plan was underfunded by 13% in 2003, Bear Stearns predicts that the average plan will be overfunded by 2% in 2006 due to rising rates and market returns. We'll see?

By the way, WSJ 's supplement was on benefit plans today. I can barely make it through the regular sections but this one had a few good tidbits on why companies might still favor traditional pension plans ( i.e. to boost earnings).
  • "The expected return Boeing is currently using is 8.75%, so its hefty contribution in 2004 ensures the company a gain of $315 million in 2005 -- or 8.75% multiplied by $3.6 billion.
    Similarly, Deere
    & Co. more than tripled its contributions in 2004 to $1.5 billion "to strengthen its funded status," according to a news release issued in February 2004. Along with improving the health of its plan, the Moline, Ill., heavy-equipment maker's contribution will result in a pretax gain of $50 million in 2004, based on an expected rate of return of 8.5% and taking into account lost interest income from the cash used to make the contribution.""


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