- NEW YORK (Reuters)
-- Think the stock market's stellar performance this year means the end
of the pension funding crisis that grabbed headlines last year?
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- 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 failed to outpace the effect of the concurrent
drop of interest rates to historical lows, analysts say.
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- 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.
CSFB assumes a 65 percent equity and 35 percent fixed income mix.
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- 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.
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- Several companies, like International Business Machines
Corp. and Johnson & Johnson, have diverted cash and stock to prop up
their pension plans, while others have watched pension costs eat into earnings.
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- "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?"'
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- PENSION COSTS BALLOON
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- 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.
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- 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.
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- Last year, the number of companies in the S&P 500
with underfunded plans rose to 334 -- the highest 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.
-
- But Uncle Sam is promising at least some relief for corporate
America.
-
- 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.
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- Nevertheless, corporate America is not out of the pension
woods yet.
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- "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."
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