Regarding New York Times media columnist David Carr's warning this week about newspaper pension plan finances, reader Peter Beller writes:
Pension funding status is the value of the plan's assets (stocks, bonds, cash, etc.) minus the present value of its liabilities (all the cash it will have to pay out to current and someday retirees, discounted back to today). Swings in the financial markets do move the values on the asset side, but the biggest determinants in these estimates (and they are estimates) are two key figures: the estimated rate of investment return on assets and especially the discount rate used to calculate the liabilities side.
Gannett's 2012 10-K statement filed with the U.S. Securities and Exchange Commission, which says it is underfunded by $560 million, notes that a half-percentage-point change in the discount rate is uses would result in a $106 million change to the estimated obligations of the pension plan.
So is Carr right to be worried? In a word, absolutely. Comparing Gannett to the universe of financially robust U.S. corporations does not make sense. To compensate for lackluster investment returns the company will have to fund its pension from free cash flow (the dividend would be a good place to start). And corporate pension owners rarely use conservative rates to make their pensions look even worse than they are (Gannett thinks it will make 8.75% a year on its investments) so it is reasonable to assume that a credit analyst from Fitch might take issue with Gannett's accounting figures.
One thing Carr forgot to note is that a major reason most corporate plans (including newspapers's) are underwater right now is that bond rates are the lowest they've ever been and regulators require companies to use those rates to discount their liabilities, so lower rates mean higher estimated obligations in the future.
If bond rates were to increase, those estimates would go down (although the bonds held as investments would drop in value, too).
As always, other views are welcome. Please post your replies in the comments section, below. To e-mail confidentially, write jimhopkins[at]gmail[dot-com]; see Tipsters Anonymous Policy in the rail, upper right.
Gannett's 2012 10-K statement filed with the U.S. Securities and Exchange Commission, which says it is underfunded by $560 million, notes that a half-percentage-point change in the discount rate is uses would result in a $106 million change to the estimated obligations of the pension plan.
So is Carr right to be worried? In a word, absolutely. Comparing Gannett to the universe of financially robust U.S. corporations does not make sense. To compensate for lackluster investment returns the company will have to fund its pension from free cash flow (the dividend would be a good place to start). And corporate pension owners rarely use conservative rates to make their pensions look even worse than they are (Gannett thinks it will make 8.75% a year on its investments) so it is reasonable to assume that a credit analyst from Fitch might take issue with Gannett's accounting figures.
One thing Carr forgot to note is that a major reason most corporate plans (including newspapers's) are underwater right now is that bond rates are the lowest they've ever been and regulators require companies to use those rates to discount their liabilities, so lower rates mean higher estimated obligations in the future.
If bond rates were to increase, those estimates would go down (although the bonds held as investments would drop in value, too).
As always, other views are welcome. Please post your replies in the comments section, below. To e-mail confidentially, write jimhopkins[at]gmail[dot-com]; see Tipsters Anonymous Policy in the rail, upper right.
Good analysis, Jim. And bond rates are likely to remain at low based on the Federal Reserves' plan to keep rates down at least through 2014 as Bernake tries to stimulate growth.
ReplyDeleteSo the question is this: does Gannett bump up funding or merely delay smassive layoffs so it doesnt drain the pension fund? Or does it look to save other ways, like du,p health plan coverage entirely on to employees?
You can bet that Gracia's retirement plan isnt under funded.
ReplyDeleteBut doesn't ERISA protect pensions? I think you should mention this jim
ReplyDeleteThis plan will go under in less than five years, casting away all kinds of people to fend retirement on their own.
ReplyDelete12:41 You are thinking of the Pension Benefit Guaranty Corporation, a government agency created under the ERISA law of 1974.
ReplyDeleteAlthough the PBGC protects private pension plans, it caps the amount any retiree can earn. This is from the agency's fact sheet; I've highlighted the key dollar amounts:
"The maximum pension benefit guaranteed by PBGC is set by law and adjusted yearly. Generally, the limit is permanently established for each pension plan based on the plan's termination date except for cases in which termination occurs during a plan sponsor's bankruptcy or for certain airline industry plans. For single-employer plans ended in 2009-2011, workers who retire at age 65 can receive up to $4,500.00 a month (or $54,000.00 a year). For plans ended in 2012, workers who retire at age 65 can receive up to $4,653.41 per month, or $55,840.92 per year. The guarantee is lower for those who retire early or when there is a benefit for a survivor. The guarantee is increased for those who retire after age 65."
The pension plan is so underfunded that it has to borrow from banks to pay out.
ReplyDeleteup to $4,500 a month? I guess most Gannett retirees are safe then. most have a lot lees than that!!!
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ReplyDelete$4,500 a month? After 25 years ( I took the EROP in April) I don't even get $1,000. (gross)
ReplyDeleteMust be those Coporate who make that.
I'm still in shock over the fact that our pensions are based on career average salary. That means that my first year (at $110 per week) is weighted the same as my last year (a lot more). After 34 years with the company I was embarrassed by my monthly check ... though it is better than nothing.
ReplyDelete