Berkshire Hathaway
More Scary Benefit Plan Numbers

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By mmhartfield
April 29, 2003

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There seems to be more interest in this stuff on this board than most others...perhaps because investors here have the intestinal fortitude to face reality than ignore the facts.

Now, just the facts...

I recently completed a study of the top 250 companies in the S&P 500 and their 10-k filings (through March 31) for FY 2002. Roughly 45% of the companies had filed (and also had pension plans).

In aggregate, these companies had $656 billion in U.S. pension liability (as measured by PBO). Since not every company follows the same reporting standards, some of this liability includes nonqualified arrangements. Whenever possible, only qualified plans were included in the study.

Offsetting this liability were $567 billion in assets (note: most non-qualified plans are unfunded so to the extent they were included in the liability the funded status is worsened).

Hence, there was a shortfall of about $90 billion.

The median discount rate was 6.75%. Adjusting to a more Berkshire-like 6.3% would probably increase the underfunding by around $30 billion.

While it doesn't affect funded status, many people on this board would be interested to note the median return on asset assumption for 2003 is 8.75%. Indeed the 10%-tile assumption is 8%, 150 basis points above BRK's. Clearly, in the aggregate these companies' income statement will be dressed up by at least $8.5 billion in 2003 relative to BRK (who uses 6.5%). FWIW, kudos to Merril Lynch who was actually more conservative than BRK on discount rate and return on assets!

Now the real scary facts...

$90 billion in underfunding (scaled to $120 billion on a roughly BRK-comparable basis), but have you looked at their retiree health obligations?

The APBO (the measure for retiree medical liabilities) for these same companies (a few companies drop off since they don't sponsor such plans even though they sponsor pension plans) is $250 billion.

However, they only have $38 billion in assets supporting these liabilities.

Yep, without any adjustments for discount rate differentials and medical trend, the underfunded status of these companies is $212 billion, almost 250% of their woeful pension underfunding.

Adding insult to injury, the medical trend is 10%+ in the short term, meaning this underfunding is growing far more rapidly than it is with pension (although pension funding is paradoxically more affected by asset returns since they are better funded currently).

What's worse, the U.S. government is not making it easy to fund these obligations (except for collectively bargained benefits--they receive a tax exemption...hmmmmm) nor does the government insure these benefits like the PBGC insures pension benefits.

For the "average" American worker, the fact is inescapable: you will be paying for the vast majority of this benefit, despite what your employer tells you. In fact, even if you are already retired, you aren't protected (but the company may try to save you first!). Of course, you can bail into Medicare at 65.

I add these facts together to predict that the baby boomers will not be retiring early. Rather, the challenge is how companies can capitalize on them as they retire later and later than the prior generation.



P.S. If there is enough interest, I would be happy to discuss what the PBGC guarantee really means for pensions.

Another note:
General Motors and Ford alone are 35% of the APBO reported (and 37% of the underfunding).

By contrast, these two are 18% of the PBO (and 29% of the pension underfunding).

Just because you have a well funded pension plan doesn't mean you are out of the woods...check out GE, VZ, and SBC for examples.

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