VideoCorporate America has something new to worry about.
Executives at companies that still offer defined benefit (DB) pension plans are beginning to realize they don't have enough money to cover the payouts for those plans.
Of course this should not be too surprising given that the stock markets have been in a virtual freefall for more than two years.
Companies that invested some of their DB money in short-term fixed-income instruments also experienced lower-than-expected returns due to the big decline in interest rates during the past two years.
Last month, investment bank Merrill Lynch warned that 98 percent of the 346 companies in the S&P 500 that offer DB pension plans will find their plans underfunded by the end of this year.
Even so, as company after company serves up the grim news, the large sums seem staggering.
On Thursday, for example, management at Yum! Brands Inc. (formerly Tricon Global), the owner of Kentucky Fried Chicken, Pizza Hut, and Taco Bell, said it expects the company's pension plan will be underfunded by about $100 million in 2002. The reason? Declines in interest rates and the stock market.
Yum said the deficit will result in a charge to shareholders' equity.
Meanwhile, auto-parts maker Delphi announced this week it will funnel an extra $800 million into its pension fund during the next three years due to the decline in stock prices.
What's more, Delphi's management warned the pension fund gap would swell to $3.5 billion by January if the stock markets don't recover. The company's pension liabilities were already underfunded by $2.4 billion at the beginning of this year.
And at white-goods maker Whirlpool, management said the sharp drop in the equity markets has reduced the value of its pension plan assets. As a result, the company's DB plan, which historically has had an overfunded position, currently is underfunded by approximately $200 million.
Assuming no future change in valuations and interest rates from September 30, 2002, the company would be required at year-end to either record a fourth-quarter noncash charge to shareholders' equity, make voluntary cash contributions, or a combination of the two.
Whirlpool management also said it expects its pension expense to increase in 2003.
"The company remains confident that its pension plan has the appropriate long-term investment strategy," added Whirlpool management.
Meanwhile, the United Steelworkers of America said the pension plan at Middletown, Ohio-based AK Steel is now a substantial drag on that company's profits. The union added that prior to 2001, the steelmaker's pension plan contributed substantially to earnings.
"AK Steel has employed a unique approach to its pension accounting that has exacerbated this situation," the union asserted. "Under this method, the difference between AK's expected pension returns and actual returns in 2002 will likely lead to a sizable fourth-quarter charge."
The union noted, for example, that AK Steel currently expects the pension fund to return 9.25 percent annually. So, if its return comes in at, say, minus 5 percent, then the company will have to take a $400 million charge in the fourth quarter, it added.
If AK lowers its expected return assumption, then the quarterly charge would be smaller, but operating earnings would be reduced in 2003. In 2001 the company suffered a 6 percent loss on its pension assets, the union claimed.
Further, the union noted that AK Steel's rate of return assumption for its pension fund is higher than the S&P 500 median, higher than the average of other steel companies, and was higher than 83 percent of Fortune 500 companies surveyed by Deloitte & Touche in 2000.
Earlier this week, Fitch Ratings reported that the pension funding gap for U.S. workers in the auto industry will more than double, from $13.9 billion in 2001 to more than $30 billion by the end of fiscal 2002.
Workers Believe They're Getting the Pay Shaft
Now here's a surprise: The majority of workers think they're underpaid.
That's right. According to a recent survey of nearly 13,000 employees conducted by Watson Wyatt, just 41 percent of the respondents think they're paid as much as their peers in similar positions at other companies.
Only slightly more—48 percent—think they are being paid fairly compared with people with similar jobs in their own companies.
"Companies must take a close look at employees' perceptions of pay fairness both within and outside their own organizations or risk losing people once the economy improves and labor-market mobility is restored," said Ilene Gochman, Watson Wyatt's national practice leader for organizational measurement. "In fact, other Watson Wyatt research has shown that pay dissatisfaction is a key reason why top-performing employees leave their companies."
Why are employees unhappy with their pay? One reason: poor communication.
Just 43 percent of employees in the survey said their companies do a good job explaining how their pay is determined. According to Watson Wyatt, that's a 13 point drop since 2000—and the lowest figure for pay communication in the survey since 1994.
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