Corporate Finance Advisory report offers client guidance for underfunded pensions
Sep 07, 2012
As an increasing number of corporate clients grapple with their underfunded pensions, J.P. Morgan’s Corporate Finance Advisory (CFA) team has issued a new report describing alternative approaches to pension management that Investment Banking coverage bankers can discuss with clients.
CFA describes the various approaches being used to lower corporate pension risk in its latest report: “Time for a Pension Paradigm Shift? Catalysts and strategic considerations.” The report’s authors will also describe the report’s recommendations in a conference call September 13 at 4:30 p.m. ET, with replays available for one week after the call.
“On an aggregate level for the S&P 500, the funding ratio dropped from 103.6% at the end of 2007 to 79.1% at the end of 2011,” the report states, attributing the shortfall primarily to subpar equity market returns and surging pension liabilities. Even though the companies have made almost $250 billion in contributions to their pension funds between 2008 and 2011, the funding gap of the S&P 500 continues to increase.
“Many companies have come to the conclusion that, despite massive annual contributions, they remain exposed to significant (and unwanted) economic volatility because of the large size of their pension plans and the mismatch between pension assets and liabilities,” the report states.
As a result, corporations have begun implementing shifts in pension management policies. The alternatives have included:
- A voluntary contribution to fully fund the plan
- A capital raise to fund the contribution
- A change in the pension asset mix toward 100% fixed income
- A lump sum payment offer to some groups of plan participants, and
- A purchase of annuities from insurance companies for some plan participants
CFA recommends that each firm should customize the solution that best fits its unique situation, as not all of the recommended shifts are ideal for every firm. Equity investors, analysts and rating agencies responded positively to companies that have addressed their pension issues through these alternatives. They approved the increased transparency, reduced risk and their increased ability to focus on their core businesses, rather than being distracted by pension issues.
To participate in the call on Thursday, September 13 at 4:30 p.m. ET, the numbers are:
U.S. toll free: 877-917-7133
Replay numbers are:
U.S. toll free: 866-428-3802