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Commentary > Bid and Ask
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Pensions: Still a problem
Even as the market's risen, corporate pension plans have become more underfunded.
November 26, 2003: 8:09 AM EST
By Justin Lahart, CNN/Money Senior Writer

NEW YORK (CNN/Money) - With the stock market's big recovery this year, worries about faltering corporate pension plans have all but faded away. But the pension mess is still very much with us.

The quick and dirty on the problem goes like this: Through the 1990s, the stock market was chugging along and pension plans were seeing big gains. As a result, companies didn't have to worry about contributing any money to their plans.

Then came the crash. According to calculations from Credit Suisse First Boston's accounting group, pension plans of companies in the S&P 500 went from being overfunded by $250 billion at the end of 1999 to being $225 billion underfunded at the end of 2002. Companies like General Motors and IBM were forced to pony up billions of dollars just meet their plans' obligations. So far this year, pension costs have trimmed Honeywell's earnings per share by a quarter.

And now? Credit Suisse First Boston reckons that, despite this year's stock market gains, at the end of the year S&P 500 pension funds will be underfunded to the tune of $247 billion. Pension costs will rise from this year's estimated $19 billion to $26 billion -- which comes to about 5 percent of what analysts think S&P 500 earnings will be in 2004.

Congress is busy crafting get-out-of-jail-free cards for companies with big pension shortfalls. Last week the House passed a bill, now headed to the Senate, that would reduce the big pension payments that airlines must make by 80 percent. Congress will allow companies, as it did last year, to calculate the present value of future benefits using high-grade corporate bond yields rather than the (lower) 30-year Treasury yield. This will reduce their costs.

Such temporary fixes are, however, temporary. If a rising market and rising interest rates don't come along to bail them out, companies could see their pension problems really come home to roost.

"The bottom line is that the problem has definitely gotten worse," said Howard Silverblatt, editor of quantitative services at Standard & Poor's. "If this goes on much longer, it's not going to be just an investor concern, it's going to be a retiree concern."

That would politicize the issue even more. One imagines that, faced with the choice, Congress would lean toward protecting retiree benefits rather than protecting corporate profits.

Despite the risks it could present to their portfolios, pension accounting is so complex that it gives most investors the sort of glazed look that would put a Krispy Kreme to shame.

But new accounting rules, expected to come into play next year, will require that companies more fully disclose their pension plan allocations, current and planned contributions, return expectations and what retirees are owed in future benefits.

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Once investors see the hard data on pensions, thinks Harvard Business School accounting professor David Hawkins, they'll worry a little more about how companies are going to meet their obligations -- although how much they worry may depend on how stocks are doing.

"When the market is moving up, most people forget about accounting," he said  Top of page




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