2008 Leaves Pensions Underfunded
Stock Losses Leave $400 Billion Deficit; Shoring Up Funds May Be
By David S. Hilzenrath, 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
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
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.
Watson Wyatt estimates that corporate pension plans began 2009
with $1.63 trillion in assets and $2.12 trillion in liabilities,
Warshawsky said. The firm estimates that companies will have to
more than double their contributions to pension plans this year,
to $111.2 billion from $50.5 billion in 2008, he said.
Both Mercer and Watson Wyatt advise companies on employee
Some business groups have been calling for relief from the
federal law that would force them to boost pension fund
contributions in the short run, and the government has already
eased some requirements. Relaxing the requirements could entail
another compromise -- the health of the pension plans.
Even before the current recession, traditional pension plans
that promise fixed retirement benefits were an endangered
species for workers in the private sector. "As
manufacturing and the
organized labor footprint have contracted, the defined benefit
plan has contracted," said the Brookings Institution's J. Mark
Iwry, a former pension system regulator.
Pensions have largely been supplanted by 401(k) plans, which
offer no guaranteed payouts.
Like pension funds, Americans' 401(k) accounts have generally
plummeted over the past year, and some companies have added to
the strain by cutting matching contributions.
Whether the responsibility rests with corporate pension fund
managers or individual employees managing their accounts, the
nation's ability to convert relatively low savings rates into
comfortable retirements depends on investments not merely
outstripping inflation but delivering strong and stable returns
over the long run. That proposition has been sorely tested of
Keith Ambachtsheer, an adviser to pension funds, says the nation
may be in store for "a radical rethinking of how we deliver
pensions to private-sector workers."
Increasingly, the burden may fall to taxpayers, as it has with
other aspects of the nation's financial troubles, said Kent
Smetters, an associate professor at the
University of Pennsylvania's Wharton School.
When companies go bankrupt and are unable to shoulder their
pension obligations, the federally chartered Pension Benefit
Guaranty Corp. steps in and covers the shortfall, subject to
legal limits that would leave many higher-paid workers with
smaller pensions than they had been promised.
The PBGC is funded through insurance premiums paid by
employer-sponsored pension funds, but Smetters predicted that
the PBGC eventually will need a federal bailout.
As of Sept. 30, when its last fiscal year ended, the PBGC
reported a deficit of $11.15 billion.