Pensions... will Batman save us?

There's an interesting article in the Wall Street Journal today about pension assumptions in accounting, and another one in the NY Times (links below). Both hit close to home, because I see pension accounting as rather equivalent to Gotham city, this place with both nice skyscrapers and lots of dark alleys to hid in and meet with sketchy mob bosses. Why over-dramatize pensions into a city in need of a Batman-like rescue? I think there are a lot of things about pension expenses that the average American doesn't know (but should).

I realize that this is the moment where the eyes of most of my friends in the 40-and-under range usually glaze over and they quietly mutter to themselves 'who the heck cares about pensions?' Well, I do. And you should. Pension costs affect expenses for both companies and governments, and this in turn affects their stock prices (or in the government's case, our taxes). Thus pensions affect all age brackets, even those decades from retirement.

Ok, fine. Maybe I've convinced you to keep reading and maybe I haven't. But what I think people should realize is:

The time value of money [said in a booming James Earl Jones voice]

A common concept in finance is the time value of money. This is the idea that money appreciates over time if you invest it. Let's say 8-year-old Timmy has a keen investment sense, and wants to buy a $100 bicycle in 3 years. Timmy could put $100 under his mattress and wait 3 years, but since Timmy is finance-savvy he'll invest the money in a CD/money market/stock/whatever and it will appreciate. If Timmy earns 10% each year on his money, he only needs to save $75 now to buy the $100 bike in 3 years. The critical piece is estimating what % return you will receive. If Timmy earns only 2% a year instead of 10%, he needs to save $95 now rather than 75%. The % makes a huge difference.

Pension accounting relies heavily on the time value of money theory, because companies are trying to estimate how much money they need to save now to pay for pensions later on. I think it's a good thing that companies are required to include pension expenses on their balance sheet (they didn't use to be). But what I find rather deceiving is that each company gets to PICK what return rate they want to use. There's no industry or government standard required. So if Ford wants to estimate a 10% yearly return, they are free to do so (they have to disclose the % rate they use but it's buried deep in the 10K footnotes that most people skim or don't read). Most companies/governments use 7.5-9.5% return assumptions in order to minimize the "how much do we need to save now" cost number. But who the heck is earning 8-10% returns? CDs from banks are about 1% now. Stock market returns for the last decade are flat at 0%. Even if you take an average over the last 60 years, the S&P 500 (a benchmark of the average stock market performance) has earned about 7%. And even a small change in estimated returns makes a big change in cost today (as poor Timmy discovered).

So what's the real point? Be aware that the billions of pension expenses discussed by companies/governments in the news are just estimates, and they are estimates that (at least in my opinion) often fall short of what the cost will really be down the road. Companies/goverments' pension plans are grossly underfunded now, and would be even more so if return %'s were more realistic.

So, if you're thinking about investing in stock/bond for a company that offers pensions, check out their pension accounting footnote first! You can find company 10K yearly earnings filings here:
http://www.sec.gov/edgar/searchedgar/companysearch.html

And once you're there, the pension footnote is usually called "Retirement Benefits" or something similar. You're looking for the return % that is called "Expected Return on Assets"

Ford looks like this (the US Plan column is the main one... do you see the 8.25%?)

		Pension Benefits
		U.S. Plans								Non-U.S. Plans								U.S. OPEB
		2009				2008				2009				2008				2009				2008
Weighted Average Assumptions at December 31 (a)
Discount rate			5.86	%			6.50	%			5.68	%			5.95	%			5.74	%			4.95	%
Expected return on assets			8.25	%			8.25	%			7.17	%			7.11	%			—				4.67	%
Average rate of increase in compensation			3.80	%			3.80	%			3.15	%			3.13	%			3.80	%			3.80	%
Initial health care cost trend rate (b)			—				—				—				—				—				5	%
Assumptions Used to Determine Net Benefit Cost for the Year
Discount rate (c)			6.50	%			6.25	%			5.93	%			5.58	%			4.95	%			5.81	%
Expected return on assets			8.25	%			8.25	%			7.11	%			7.26	%			4.67	%			7.17	%
Average rate of increase in compensation			3.80	%			3.80	%			3.13	%			3.21	%			3.8

You can also tell how underfunded a company is in another chart in the same footnote (again, this one's from Ford).

Look about 2/3 down the chart to "Funded status at December 31" --- for 2009 it's (6,181). Since the report is in millions, this means Ford is $6 BILLION underfunded... ie, even if they did earn 8.25% every year, they'd need to be saving $6B more now than they have to be able to pay pension expenses down the road! Yikes!

Pension Benefits
		U.S. Plans								Non-U.S. Plans								Worldwide OPEB
		2009				2008				2009				2008				2009				2008
Change in Benefit Obligation (a)
Benefit obligation at January 1		$	43,053			$	44,412			$	20,382			$	25,558			$	19,065			$	28,096
Service cost			343				378				251				301				408				326
Interest cost			2,693				2,682				1,193				1,321				899				1,456
Amendments			—				4				(54	)			117				(175	)			(928	)
Separation programs			12				334				121				42				2				13
Curtailments			—				—				(19	)			—				—				(1	)
Settlements			—				—				(1	)			(58	)			(13,637	)			—
Plan participant contributions			27				25				80				101				40				42
Benefits paid			(3,908	)			(3,960	)			(1,456	)			(1,380	)			(1,673	)			(1,628	)
Medicare D subsidy			—				—				—				—				67				68
Foreign exchange translation			—				—				1,927				(4,779	)			253				(478	)
Divestiture			—				—				—				(6	)			—				—
Actuarial (gain)/loss and other			2,418				(822	)			921				(835	)			804				(7,901	)
Benefit obligation at December 31		$	44,638			$	43,053			$	23,345			$	20,382			$	6,053			$	19,065
Change in Plan Assets (a)
Fair value of plan assets at January 1		$	37,381			$	45,696			$	14,707			$	21,396			$	2,786			$	3,875
Actual return on plan assets			4,855				(4,480	)			1,692				(2,036	)			792				(1,011	)
Company contributions			136				138				968				1,209				—				—
Plan participant contributions			27				25				80				101				—				—
Benefits paid			(3,908	)			(3,960	)			(1,456	)			(1,380	)			(62	)			(77	)
Settlements			—				—				(1	)			(58	)			(3,517	)			—
Foreign exchange translation			—				—				1,581				(4,510	)			—				—
Divestiture			—				—				—				(3	)			—				—
Other			(34	)			(38	)			(7	)			(12	)			1				(1	)
Fair value of plan assets at December 31		$	38,457			$	37,381			$	17,564			$	14,707			$	—			$	2,786
Funded status at December 31		$	(6,181	)		$	(5,672	)		$	(5,781	)		$	(5,675	)		$	(6,053	)		$	(16,279	)
Amounts Recognized on the Balance Sheet (a)
Prepaid assets		$	13			$	15			$	101			$	53			$	—			$	—
Accrued liabilities			(6,194	)			(5,687	)			(5,882	)			(5,728	)			(6,053	)			(16,279	)
Total		$	(6,181	)		$	(5,672	)		$	(5,781	)		$	(5,675	)		$	(6,053	)		$	(16,279	)
Amounts Recognized in Accumulated Other Comprehensive Loss (b)
Unamortized prior service costs/(credits)		$	1,895			$	2,268			$	433			$	557			$	(2,799	)		$	(3,510	)
Unamortized net (gains)/losses and other			5,705				4,858				6,100				5,163				1,772				611
Total		$	7,600			$	7,126			$	6,533			$	5,720			$	(1,027	)		$	(2,899	)
Pension Plans in which Accumulated Benefit Obligation Exceeds Plan Assets at December 31 (a)
Accumulated benefit obligation		$	25,686			$	24,975			$	16,707			$	11,649
Fair value of plan assets			20,248				20,044				12,034				7,171
Accumulated Benefit Obligation at December 31 (a)		$	43,756			$	42,279			$	21,975			$	19,197

Ok, that's it for the accounting standards soapbox. But maybe one soul in a million will check out a footnote one day and make this rant worth it :o)


The news articles mentioned above:
WSJ
NY Times

9/11...2010

If you have friends in Gloryland,
Who left because of pain
Thank God up there, they'll die no more
They'll suffer not again.

Then weep not friends, I'm goin' home
Up there we'll die no more
No coffins will be made up there
No graves on that bright shore

The lame will walk in Gloryland
The blind up there will see
The deaf in Gloryland will hear
The dumb will talk to me

The doctor will not have to call
The undertaker, no
There'll be no pain up there to bear
Just walk the streets of gold

We'll need no sun in Gloryland
The moon and stars won?t shine
For Christ Himself is light up there
He reigns of love divine

Then weep not friends, I'm goin' home
Up there we'll die no more
No coffins will be made up there
No graves on that bright shore
(Gloryland by Carbon Leaf)


9 years... may we continue to remember.

Splenda... Splendid?

There is a lot of debate out there on how to lose weight. No carbs, low-fat, blah blah. I am happy to sidestep the entire question and come to the general conclusion that we can all agree sugar is bad for you…although equally highly delicious. For years I have shied away from baking with Splenda (figuring it was a disaster waiting to happen), but I finally caved a couple weeks ago and tried it in a banana bread recipe, hoping that if the Splenda truly was awful the natural sweetness of the bananas might salvage things. Well, much to my surprise, the bread was great! The texture was fluffy like it was supposed to be (fluffy for banana bread anyway) and I honestly couldn’t tell that there wasn’t real sugar in it.

Of course, I made mine with chocolate chips, so the chocolate might have masked the lack of added sugar… but still, it’s a healthier version than it would have been! I thought I’d pass along the recipe to anyone who, like me, finds themselves in the curious-but-scared-to-try-it-before-someone-else-verifies-it-might-work stage of Splenda cooking.

Banana Bread (healthy substitutions optional…after all, bananas are healthy by themselves!)
½ cup butter, soft
1 cup granulated sugar (I used splenda, as copiously detailed above)
2 eggs
1 ½ cup all-purpose flour (I used whole wheat)
1 tsp baking soda
1tsp salt
2.5-3 bananas, ripe & mashed
½ cup sour cream
1 tsp vanilla
1 cup semi-sweet chocolate chips (I like dark chocolate chips for the darker flavor) or ½ cup chopped nuts

Preheat oven to 350. Combine butter, sugar, eggs. Sift together flour/soda/salt and add to butter mixture. Add mashed bananas and mix together. Add sour cream, vanilla, and chocolate chips (or nuts) and stir again. Pour into pan and bake approx one hour. Then enjoy!

I initially found that this recipe made slightly too much batter for one loaf but not quite enough for two. Annoying. (Let’s just say the first time around I succumbed to temptation to use all the batter, filled the pan to the brim, and 30 minutes later was staring in horror as clumps of batter overflowed, fell to the bottom of the oven, and burned to an ‘aromatic’ crisp). I later realized I had an abnormally big loaf pan, so I think for most this would do two loaves… or I’ve actually baked mine in a 9x9 pan. The recipe rises a decent amount (hence batter dripping/burning story above), so in a 9x9 pan it can pass as breakfast or can be served as cake as the mood strikes. I learned this culinary flexibility from my mother…to quote her wisdom on a similar culinary treat, if it’s after noon, it’s apple pie. If it’s breakfast time, it’s apple Danish!

Being a New Yorker now I don’t do a whole lot of meal cooking, but I found this website to be a good source for recipes. Many of the recipes are based around South Beach food (but don’t let the mention of healthy food scare you off); I found it a good resource for lots of different foods… I personally recommend the roasted Italian sausage soup – it was delicious!
http://kalynskitchen.blogspot.com/2005/05/recipe-favorites.html

And the mentioned soup:

http://kalynskitchen.blogspot.com/2008/03/roasted-italian-sausage-soup-recipe.html