Earnings Reports Start Revealing Ugly Pension Costs
Cowan, Dow Jones Newswires
The Wall Street Journal
Wednesday, January 28, 2009
There have been warnings for months about the severity of U.S.
corporations' pension underfunding, but this week's round of
earnings reports showed just how badly retirement plans will
weigh on the companies that operate them.
From the furnaces of United States Steel Corp. (X) to the
newsroom of publisher New York Times Co. (NYT), the effects of
2008's crushing market on pension assets was laid out in
year-end earnings in recent days.
On Tuesday U.S. Steel revealed it sees total costs for pension
and other benefit plans for 2009 at $360 million, up nearly 60%
from 2008. New York Times disclosed Wednesday its pension
is underfunded to the tune of $625 million, an amount that it
will have to begin paying down in 2010 if markets don't
magically reverse course and repair the damage this year.
The pair join heavy-equipment maker Caterpillar Inc. (CAT),
transportation company Con-Way Inc. (CNW) and cardboard box
maker Smurfit-Stone Container Corp. (SSCC) in recent weeks in
lifting the curtain on the ugliness that awaits
investors at companies with large pension plans.
The pensions' losses couldn't have come at a worse time for many
of these industries. With the worldwide economic slowdown,
their operating businesses are already under pressure; New
York Times' debt was recently downgraded to junk and
Smurfit-Stone has filed for Chapter 11 bankruptcy protection.
"The economic factors last year were so significant, and so
broad-based, that few sectors that have these plans will be
unaffected" by pension grief, said Cynthia Mallett, a vice
president in MetLife Inc.'s (MET) corporate benefit funding
There's no doubt there will be more ahead as companies lift the
curtain on their year-end earnings in the days and weeks ahead.
The combination of declining asset values and higher interest
rates' upward nudge to retirement liabilities is unlikely to
leave many companies smugly looking at a fully-funded pension.
While some firms, such as Times Co., will have some breathing
space before they have to start making up the funds' shortfalls,
many others will have to start pumping cash into their
retirement plans in 2009.
Studies that estimated the level of pension underfunding last
year all pointed to a similar downturn. Standard & Poor's
in late December forecast that S&P 500 company pension funds
would be short by $257 billion, easily surpassing the record
$219 billion underfunding set in 2002. Mercer said at the
beginning of this month that S&P 1500 companies' pensions
suffered losses of an estimated $469 billion over 2008, causing
an aggregate surplus of $60 billion at the end of 2007 to be
replaced an estimated aggregate deficit of $409 billion at the
end of 2008. The study by Mercer also showed that pension
expense is likely to increase from $10 billion in 2008 to an
estimated $70 billion in 2009.
Earlier this week, pension consultant Watson Wyatt Worldwide
Inc. (WW) calculated that globally, pension balance sheets
deteriorated by about 29% in 2008 and fund assets in 11 major
markets shrank back to below 2005 levels.
While the various forecasts measure different groups of
companies, they all hew to the same directional trend, say
pension consultants. The initial earnings report
revelations in recent weeks indicate the predictions are mostly
on target -- pension plan underfunding will likely turn out as
forecast, no better, no worse, says Alan Glickstein, a senior
retirement consultant with Watson Wyatt.
"I don't think there's been any great level of unexpected
revelations in the funded status than we had been predicting,"
said Glickstein. "So far, things seem very consistent with
what we forecast, and very sad."
By Lynn Cowan, Dow Jones Newswires; 301-270-0323;