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Strategies & Market Trends : Asia Forum -- Ignore unavailable to you. Want to Upgrade?

To: Robert Douglas who wrote (6472)	9/17/1998 5:05:00 PM
From: Ramsey Su	Respond to of 9980

Robert, in addition to pension obligations, there is also the issue of stock options. The argument being that industries such as the high tech companies of Silicon Valley rely on stock options as part of a compensation package to attract employees. There were little attention paid to these options in the last few years because most of these options came through. I remember ORCL having to do something to keep their employees happy, after ORCL took a big hit earlier this year. I wonder what the net effect of the recent stock market movements on these compensation plans. If the companies do not adjust, the employees receiving these options just received a pay decrease in kind. If they do adjust, that means their labor cost just shot up. Comments? Ramsey

To: Robert Douglas who wrote (6472)	9/17/1998 5:37:00 PM
From: Paul Berliner	Read Replies (1) \| Respond to of 9980

Re: pension liabs., stock comp., greenspan......... Robert, it certainly is a problem that will plague many bellweather companies in the not to distant future. However, acutuaries here are hired to determine ways of achieving the return needed without affecting the Company. I'm sure many Co.s have saved a great deal because of the unrealized gains, but a good pension fund mgr. will have an asset allocation that should weather the storm. Most pension fund mgrs. are free to invest in real estate and other hard assets that appreciate when inflation hits, plus they all buy far out on the yield curve, much like insurance co.s, so they have fat gains on the bonds to offset a 20% decline in the stock allocation's portion. I doubt the Japanese pension funds go so far as they ones here do, as far as risk mgmt. is concerned. As for Ramsey's mention of the stock comp., the SFAS/FASB passed SFAS #123 and it took effect in the 12/97 10-K's filed by any Co. It shows what earnings really are after accounting for stock based comp. Out of all the Companies I've written up at my current position, the worst case of reduced earnings I've ever seen is Interstate Baking (IBC). Lastly, Greenspan trashes the IMF, and hours later Rubin is on Jim Leahrer extolling 'em!

To: Robert Douglas who wrote (6472)	9/18/1998 8:00:00 AM
From: Alias Shrugged	Read Replies (1) \| Respond to of 9980

Hello Robert (and Paul and Ramsey) Re: Increased Pension Expense for Major US Corporations. When I first saw the article posted here concerning unfunded Japanese pension liabilities, I also thought of the future impact on US corporations. (To quote Mike Burke - "Great minds think alike - and so do we!) I worked 17 years as a pension consultant for an international employee benefits consulting firm; my clients were US corporations, mostly small and midsized. The evolving environment presents a double whammy for US corps. For those that do have defined benefit pension plans (as opposed to ESOPs, 401(k)s, profit-sharing, etc.), pension expense will be impacted by the decreasing interest rates and the poor asset performance. Pension liabilities will increase due to the lower interest rates which they are forced to use to discount the streams of future benefit payments. And decreasing Plan assets will have an obvious effect on pension expense. A good rule of thumb for the prescribed discount rate is 30 Yr Treas rate plus 50-75 basis points. Uhh, that 30 year rate has been dropping, no? I would agree with several of Paul's points: (1) Most of these Plans have substantial asset gains from 1995, 1996 and 1997 which have not yet been brought to the bottom line. These can offset the 1998 poor asset performance, but 1999 pension expense will still be impacted. (2) Asset allocation. Yes, Plans have their assets spread among a number of classes. Bonds have done well (although I do not think they are as far out on the yield curve as Paul thinks - most will use the Shearson Lehman Intermdiate index as their bogey), but they also have international equity exposure (ugh!) and small cap exposure (double ugh!!). Under the accounting standard (FASB Statement 87), their are a number of smoothing mechanisms used in calculating pension expense to reflect asset performance and liability changes due to interest rate changes. So, the impact will not be immediate. A number of companies with very well funded plans were receiving significant pension income (as opposed to pension expense) on the P+L statement. These folks will see a decrease in that income. Some may see this income flip over to expense. The big ugly poorly funded plans (think Steel Cos - but not all) will get uglier. Who are these companies? First, anyone in a unionized environment (who has not gone bankrupt and wiped out those plans) - Airlines, Steel, Rubber (tires), Baby Bells, Auto, Oil Majors, etc. Large companies that are not "new tech" (DELL, MSFT - no; HWP, IBM -yes) - Drugs, HealthCare, Banks (and other financials), etc. The great pension income tail wind will die down - it has not yet turned into a headwind. And 1999 earnings growth estimates look even sillier now. Mike