Coming: Pension Crisis?

Corporate 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.

Remarkably, another 20 percent of the respondents said they don't even know what their total compensation packages are worth.

When it comes to employee benefits, however, employees seem better informed. About 68 percent of the workers in the poll said their companies do a good job providing information on benefits.

This communication seems to pay off. The percentage of workers who believe their benefits packages compare well to packages offered by other companies jumped 10 percentage points between 2000 and 2002, to 42 percent.

When it comes to specific benefits strategies, however, employee reactions were mixed.

The majority of workers said they're satisfied with their leave benefits (71 percent), savings plans (67 percent), health-care plans (64 percent), and pension/retirement plans (60 percent).

The percentage of employees satisfied with their profit-sharing plans fell by 10 points to 45 percent between 2000 and 2002, while satisfaction with stock programs declined by 7 points to 50 percent in the same period.

Those results are not overly surprising, however, given the recent slide in both corporate profits and the equity market.

Older Workers Want Their Bennies
Based on another new poll of employees, it appears that pay is not as important as benefits to workers who are 45 and older.

According to a national AARP survey conducted by Roper ASW, participants singled out soft benefits as "absolutely essential parts of their ideal jobs." Such benefits include adequate time off (86 percent) and flexible schedules (76 percent). Respondents said hard benefits such as health-care benefits/insurance (84 percent) and good pension benefits (76 percent) were "also absolutely essential."

More than three-quarters (76 percent) of the workers in the AARP survey said the fact that they "enjoy the job" or "enjoy working" is a "major factor" in their decision to be currently working. Three out of four of the respondents said the need for money is a major factor in why they work.

In addition, 69 percent of the respondents plan to work in some capacity in their retirement years. A little more than a third (34 percent) said they would work part-time for interest or enjoyment. About one in five said they would work part-time for needed income. Another 10 percent indicated they would go into business for themselves in their golden years, while 6 percent said they would work "full-time doing something else."

Only 28 percent said they would not work at all.

The survey involved 1,500 employed workers age 45 to 74.

Interestingly, more than half (58 percent) of the surveyed workers said that "economic need" is the one major reason why they work. Yet a whopping 84 percent of the respondents indicated they would continue working even if "they won the lottery and were financially set for the rest of their lives."

Go figure.

PwC to Miss Tyco Deadline
PricewaterhouseCoopers LLP will probably not certify Tyco International's financial statements in time for the conglomerate's scheduled release of its fiscal fourth-quarter earnings on October 24, according to the Wall Street Journal.

Rather, the Big Four auditor first plans to wait for the results of a forensic audit of Tyco's financials going all the way back to 1999.

The forensic audit, being conducted by outside attorneys and a separate accounting firm, is expected to be completed by late November. PwC is cooperating in that audit.

The Journal pointed out that under securities rules, PwC actually has until late December to complete its audit and sign the letter, since that's when Tyco's annual report is due.

"Generally speaking, audits aren't completed until investigations looking into potentially material matters are completed," David Nestor, a spokesman for PwC, told the paper.

Walter Montgomery, a Tyco spokesman, reportedly said his company has been "working closely with PricewaterhouseCoopers on completing the audit," but added that he didn't know when the audit would be finished.

Atlas Shrugs: Will Reaudit Its Financials
Atlas Air Worldwide Holdings Inc. indicated it will restate and reaudit its financial results for fiscal 2000 and 2001 after determining that certain adjustments were required in a number of areas.

The company's management said it arrived at this decision while conducting a systematic review of its financial records and accounting policies. The review was initiated after Atlas replaced Arthur Andersen with Ernst & Young as the company's independent auditor back in April.

The adjustments will have no effect on the company's cash position, Atlas management added.

Adjustments will be required in the areas of inventory obsolescence, maintenance expense, and allowance for bad debt.

"We anticipate that this reaudit will be completed in early 2003, along with the completion of audited financial statements for fiscal 2002," said Atlas CEO Richard H. Shuyler.