Pension tension on the rise

Underfunded retirement plans are shaping up as a headache for companies and taxpayers alike.

EMAIL  |   PRINT  |   SHARE  |   RSS
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all RSS FEEDS (close)
By Colin Barr, senior writer


NEW YORK (Fortune) -- Retirement plans are on the mend, but the healing process is going to be long and painful.

In addition to taking a big chunk out of individuals' 401(k)s, last fall's market meltdown left 92% of corporate pension plans underfunded at year's end, according to a study by investment consultant Wilshire Associates.

As bad as that sounds, it pales in comparison to the shortfalls in public pension plans. At the end of 2006, public pension plans were already underfunded by $361 billion, according to the Pew Charitable Trusts. That was before the stock market collapse, soaring unemployment rates and tumbling tax revenues dealt municipal finances another blow.

The federal insurer of corporate pensions, the Pension Benefit Guaranty Corp., reported this month that it was $22 billion in the red in the most recent fiscal year. The PBGC takes over pensions when they are underfunded or when their sponsors go into bankruptcy, and makes up some of the payments due.

While the bounce in the stock market this year has helped the situation, observers say more pain is ahead.

Strapped municipalities will face pressure to cut back on promised benefits. Hard-hit companies will be forced to choose whether to invest in their businesses or to beef up their pension plans.

"We're going to face increasing stresses in the pension world over the next three to five years," said Leo Kolivakis, a pension industry consultant who writes the Pension Pulse blog. "People are hoping and praying the stock market will bail them out, but they're going to be disappointed."

There are several forces that account for the current pressure on pensions.

One problem was that companies didn't contribute enough to their pension plans. The reason: They were counting on high returns to pick up the slack, a scenario that didn't pan out in the stock market's lost decade.

Another was that many pension funds made bad investments, embracing so-called alternative investment classes, such as hedge funds and private equity, which have performed poorly in the market unwind.

At the same time, companies are now stuck having to pony up more. That's because of the weak economy, which has led the government to commit to low interest rates for the foreseeable future.

It's also because of the 2006 Pension Protection Act, which started taking effect last year. It includes a long overdue increase in the premiums charged by the PBGC and forces companies to be fully funded by 2015.

Congress moved late last year to ease some of the requirements and may yet stretch them out again. But in the meantime, numerous companies are facing higher funding requirements.

It all adds up to a continuing squeeze on pension funds' financial position.

"There are no good solutions in an economic downturn," said Alan Glickstein, senior retirement consultant at Watson Wyatt. "Everyone's got difficult choices right now."

The bills are starting to come due in state capitols. The West Virginia legislature recently passed a bill approving the sale of $225 million of bonds to help stressed local governments close their pension gaps. The city of Huntington in the state's southwestern corner had warned that a $125 million pension shortfall could force it into bankruptcy.

The situation is less dire for big companies. But they aren't out of the woods.

Among the companies with underfunded pension plans is oil giant Exxon (XOM, Fortune 500), whose U.S. pension plan assets were worth $6.6 billion less than the plan's liabilities at the end of 2008. The firm has contributed $4.1 billion to its plans so far this year. And Exxon made $45 billion in profits last year and retains its triple-A credit rating, so there is more where that came from.

Less certain is the fate of workers and retirees tied to companies in troubled industries such as airlines, retail and manufacturing.

Goodyear (GT, Fortune 500), the Akron, Ohio, tiremaker that has cut thousands of jobs in the past year, said in its annual report that its U.S. pension funds were underfunded by $2.1 billion at the end of 2008. The company, which froze its U.S. salaried pension plan last December, warned that the underfunded status would "significantly increase our required contributions and pension expenses, which could impair our ability to achieve or sustain future profitability."

Goodyear says it expects to contribute at least $300 million to its pension plans this year, including $260 million it contributed in the first nine months.

OfficeMax (OMX, Fortune 500), the Naperville, Ill., office retailer, last month contributed $100 million of its stock to a plan that was $435 million underfunded at the end of 2008.

Delta Airlines (DAL, Fortune 500), the Atlanta-based operator of the Delta and Northwest airlines, said in its 2008 annual report it expects to spend $420 million this year on pension benefits. Its pension plans' liabilities exceeded their assets by $8.6 billion at the end of 2008.

While companies are surely hoping that the market rally that started in the spring will take the edge of some of those problems, pension watchers note that the past decade should have taught all of us a lesson about banking on big market gains.

"Companies are in the same place as individuals," said Steve Foresti, managing director at Wilshire Consulting. "Everyone needs to save more. The markets aren't going to bring these balances back." To top of page

Company Price Change % Change
Facebook Inc 60.87 -0.49 -0.80%
Bank of America Corp... 16.34 -0.03 -0.18%
Microsoft Corp 39.86 0.17 0.43%
Verizon Communicatio... 46.28 -1.15 -2.42%
Micron Technology In... 26.16 -0.09 -0.34%
Data as of Apr 24
Index Last Change % Change
Dow 16,501.65 0.00 0.00%
Nasdaq 4,148.34 21.37 0.52%
S&P 500 1,878.61 3.22 0.17%
Treasuries 2.69 0.00 0.07%
Data as of 4:50am ET
More Galleries
Don't give my job to Staples Hundreds of U.S. Postal Service workers protested against experimental mini post offices at Staples. Here's why some Washington, D.C. workers don't like the deal. More
Tools to make your money grow You've started saving and built a financial base. Time for a few new strategies and tools to get your money to grow even more. From real estate to IRAs, here are some tips. More
Ready to start saving? Here's how to do it right When you are just starting out or finally starting to get serious about saving, the basics will get you far. Here are more than a dozen tips that will help you lay the base for building your net worth. More
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.