- NEW YORK (CBS.MW) -- Nearly
half the pension plans for 500 companies in the Standard & Poor's Index
are underfunded, according to a report in Barron's.
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- A total of 240 companies in the index -- or two-thirds
of the 360 S&P 500 companies that have pension plans -- had underfunded
plans at the end of 2001, according to the story in Saturday's edition.
That's the highest level of underfunded plans in 10 years.
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- The effect could be devastating on companies' bottom
lines, as they may have to dip into the corporate coffers in order to meet
their obligations to pensioners.
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- "We have over $300 billion of pension-fund deficits
in 2002 for S&P 500 companies," said Trevor Harris, head of Morgan
Stanley's valuation and accounting research group, according to the report.
"That's $300 billion of cash these companies have to come up with
over the next few years, and $300 billion that comes out of corporate cash
flow."
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- David Zion, an accounting analyst at Credit Suisse First
Boston, told Barron's the number of companies with underfunded plans could
rise to 325 by the end of next year, given the current market environment.
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- He said such companies as AMR (AMR: news, chart, profile),
the parent of American Airlines, and Goodyear Tire and Rubber (GT: news,
chart, profile), face underfunded liabilities that exceed the companies'
market capitalizations.
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- It appears Zion's predictions are coming true. Associated
Press reported late Friday that AMR, which lost $924 million in the third
quarter, could face a $1 billion charge to cover pension liability this
year unless investment returns improve.
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- AMR's market capitalization now stands at roughly $700
million. The company's shares closed Friday at $4.30, up 5 cents, and added
another 20 cents to $4.50 after hours.
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- A company's pension obligations depend largely on the
number of retirees still in its system, plus external forces such as stock
market performance.
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- Accounting rules allow companies to even out gains and
deficits for pension plans over time. But in a protracted down market such
the current one, some companies may have to go to the corporate cupboard
to fund the plans.
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- Particularly hard hit are automakers, which have massive
obligations to their workers. General Motors (GM: news, chart, profile)
says its pension assets have dropped by 10 percent this year, and Ford
(F: news, chart, profile) reports its return on assets is off by 15 percent.
See related story.
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- The problem is surfacing elsewhere. Northrop Grumman's
(NOC: news, chart, profile ) stock took a hit this week when the company
reported, among other issues, uncertainty over what its pension obligations
would be for 2003. Northrop said it was unable to offer guidance on 2003
net profits without a clear pension picture. See full story.
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- Northrop ended the week's trading sessions down 78 cents
to $100.72, but ticked up 59 cents after hours Friday to $101.31.
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- -- Russ Britt is the Los Angeles Bureau Chief for CBS.MarketWatch.com.
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