Stock Losses Leave Pension Funds Underfunded

By David S. Hilzenrath
Washington Post Staff Writer
Thursday, January 8, 2009

The collapse of the stock market last year left corporate pension plans at the largest companies underfunded by $409 billion, reversing a $60 billion pension surplus at the end of 2007, according to a study released yesterday.

Shoring up the plans could cause further pain for workers, businesses and the struggling economy at a time when they can least afford it, pension specialists said.

"The chaos that has been observed in the world's financial markets over the last 12 months has had a major adverse impact on pension plan funding and will negatively impact corporate earnings," the Mercer consulting firm reported yesterday. "Moreover, the trend in recent months has been one of alarming deterioration," Mercer said.

As Mercer and other pension specialists described it, the pension problem illustrates how the recession and the meltdown in the financial markets can become self-reinforcing.

Ballooning pension deficits will leave some companies with diminished profits, weaker credit ratings and higher borrowing costs, which can translate into lower stock prices, said Mercer principal Adrian Hartshorn. The need to cover pension shortfalls could prompt businesses to reduce spending on items as varied as equipment that boosts productivity and dividends that deliver income for shareholders.

Though shoring up pension funds is supposed to increase employees' financial security, it could involve such tradeoffs as reductions in wages, benefits and jobs, said Mark J. Warshawsky, director of retirement research at consulting firm Watson Wyatt Worldwide.

In a further irony, it could also prompt companies to freeze the amount of pension benefits employees can accrue, Warshawsky said.

But the overall economic effects may be more complicated, pension specialists said. Filling the gaps will force companies to boost their pension investments, contributing to demand for stocks and bonds.

Mercer's monthly snapshot of corporate pension plans focuses on those offered by employers in the Standard and Poor's index of 1500 big corporations, and it uses the accounting methods that companies must follow when they prepare their financial statements. Mercer estimated that the S&P 1500 pension plans held enough assets overall to cover only 75 percent of their obligations, down from 104 percent at the end of 2007. Precise figures won't be available until companies issue their annual reports for 2008 in the coming months.

Pension deficits are far from unprecedented. As recently as March 2003, the funding level for plans in Mercer's study was 73.2 percent.

When pension plans are underfunded, companies are required to plow enough additional money into the funds each year to correct the imbalance, a process than can take several years. This year, Mercer estimates that the companies in its study will end up reporting about $70 billion of pension expenses, up from about $10 billion in 2008. That would equate to an 8 percent reduction in annual profits compared with 2007, the most recent year for which companies have reported full annual results, Mercer said.

Watson Wyatt looked at the issue from a different angle but found a similar trend. It tried to assess in aggregate the condition of all pension plans sponsored by individual corporations in the United States, and it used a different set of measures -- the rules that govern the actual amount of cash companies must put into their pension funds.

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