Corporate pension woes deepen despite bull market

Corporate pension woes deepen despite bull market
Tuesday November 4, 2:16 pm ET
By Deepa Babington

NEW YORK, Nov 4 (Reuters) - Think the stock market's stellar performance this year means the end of the pension funding crisis that grabbed headlines last year?Quite the opposite, it turns out. Corporate pension plans are actually getting weaker this year, because the boost to pension assets from a rising stock market has not been able to outpace the effect of the concurrent drop of interest rates to historical lows, analysts say.

Pension plans at Standard & Poor 500 companies are expected to be underfunded by about $247 billion at the end of 2003, up from $225 billion at the end of last year, according to a recent Credit Suisse First Boston report.

Ratings agency Standard & Poor's also estimates that pension underfunding at S&P 500 companies will widen to roughly $220 billion at the end of the year from $212 billion last year, said S&P analyst Howard Silverblatt. S&P assumes 60 percent of pension assets are invested in stocks and the remaining 40 percent in fixed income assets, unlike CSFB which assumes 65 percent equity and 35 percent fixed income mix of plan assets. A pension plan is underfunded when its assets are not enough to cover its expected obligations to employees. Pension underfunding came into the spotlight last year when a prolonged bear market and falling interest rates shrunk pension assets and boosted liabilities.

Several companies, like International Business Machines Corp. (NYSE:IBM - News) and Johnson & Johnson (NYSE:JNJ - News) have diverted cash and stock to prop up their pension plans, while others have watched pension costs eat into earnings.

"It was a growing situation last year, it continues this year and it should be a concern to all investors," said Silverblatt. "'How much money does my company have to put into pensions, where are they going to get the money and what is it going to be taken out of?'"

While the bear market of the last three years was responsible for pension woes last year, low interest rates can be blamed for this year's misery. Interest rates are currently at 45-year lows after 13 rate cuts dating back to early 2001.

When rates fall, the discount rate used to calculate the pension benefits a company must pay out in today's dollars also falls. That, in turns, increases pension obligations.

Last year, the number of companies in the S&P 500 with underfunded plans had risen to 334 -- the highest level in 10 years. That figure could rise to 340 this year, CSFB estimates.

Companies also face the threat of growing pension costs this year, because of accounting rules designed to spread pension expense over several years. That means the dismal performance of pension plans in the last three years will start showing up in profits this year.

As a result, pension costs for S&P 500 companies are expected to balloon to $19 billion from $4 billion last year, according to the CSFB report.

Congress currently plans to temporarily allow companies to value pension obligations with a discount rate tied to the yield on long term, high grade corporate bonds rather than a rate tied to the 30-year Treasury bond. That would result in a higher discount rate, smaller pension obligations and reduced funding requirements.

"It's not going to be one of those situations where they turn it around in a year," said Christine Wiedman, associate professor of accounting at the University of Western Ontario in Canada. "It'll take a typical company several years, because the losses were accumulated over three years."

Temporary my foot as the saying goes. This is a plan to reduce pension liabilities and payouts in the future also. Don't tell me it's going to be made up some time in the future. That'll never happen. Another below the radar gambit for those retiring in the future. You didn't get what we promised ? Well you know, shit happens.

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