Saturday, February 28, 2009

ExxonMobil's defined benefit pension deficit explodes: undercutting equity value? A trend among most companies?

Apparently defined benefit pension deficits are affecting blue chip and other stock prices.

ExxonMobil, on Friday Feb. 27, reported that its defined benefit pension deficit more than doubled, from $6.7 billion to $15 billion. At the same time, the non-US portion of this deficit increased from $5.3 billion to $8.7 billion. That means that the US portion in creased $1.4 billion to $7.3 billion.

The company reported record 2008 profit of $45.2 billion on Jan. 30. After 2 PM Friday, the stock suddenly fell about 4%. Does this mean that the “profit” was overstated? The price did recover slightly in after-hours.

The Reuters story is here.

The information appears on pp 79-92 of the SEC Form 10K, “Annual report which provides a comprehensive overview of the company for the past year”, link here.

Pension fund values even for “stable” companies like Exxon are affected by the plunge in financial stocks, even though the “stable” companies themselves are not so directly affected in their operations by the banks; but their equity now is definitely affected, which helps further explain the deterioration of equities everywhere.

Defined benefit pension obligations normally increase as life spans increase (less so as spousal lifespans increase with the “period certain” arrangements). Yet companies, for a number of years, pushed employees into early retirement, improving their bottom line in the short run but jeopardizing equity values over the longer term.

Is this demographic shift (longer life spans without sufficiently long work histories at full salary to match) another time bomb that will blow up the equity markets even further? It’s scary.

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