Underfunded Pensions are Red Flag for Investors

Original source: SimoleonSense.com .

Nothing new here (Lowenstein and others have been talking about this for ages)…

H/T Wei

Introduction (via Herb Greenberg@ CNBC)

As we enter earnings season, here’s something you must pay attention to: Underfunded pension funds at public companies.

This is something that for years has been swept under the rug, but as Ken Hackel points out, that is about to change or should change.

Hackel, publisher of the always-smart credittrends.com and author of “Security Valuation and Risk Analysis,” has spent years analyzing companies for mergers and acquisitions, and knows a thing or two about analysis and risk.

His take: With three, five and 10-year stock returns negative, there is no way companies should be assuming 8 percent returns on their pension funds.

Yet that’s assumption of the median S&P 500 firm. And short of suddenly making up losses—and adding another 8 percent gain on top of that—Hackel does not believe companies can avoid the inevitable: Raising the funding expense, which in turns will lead to lower earnings and the need to guide down.

This can be fairly arcane (and, let’s be honest, not headline-making) stuff. As a result Hackel doesn’t believe most overworked Wall Street analysts will pay attention “until it is put in front of their faces” by the companies.

And they have to start now. Among his reasons:

• The most obvious reason is investment performance, which has taken a hit.
• The pension protection act of 2006 requires funds to be fully funded starting next year.
• Misleading actuarial assumptions that assumed, on average, 8 percent returns.
• The cost of benefits.
• The aging workforce.
• And the ratio of retired to active employees.

Click Here To Read: Underfunded Pensions are Red Flag for Investors: Greenberg