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A new law lets pension plans smooth out assets over two years, easing the crash of 2008. But it's a pittance in the face of falling corporate bond rates.
Alix Stuart, CFO Magazine
February 1, 2009
When the final tallies are complete, 2008 results for company-funded pension plans are sure to be dismal — so dismal, in fact, that Congress stepped in with some relief right before its holiday break. The Worker, Retiree and Employer Recovery Act of 2008 will temporarily ease some of the stringent pension-funding requirements set in motion by the 2006 Pension Protection Act by allowing employers to smooth asset values over two years, softening (in theory) the effects of 2008's bear market. Still, a decline in the corporate bond rate (which increases liabilities) means "many plan sponsors will be forced to write checks to their pension plans that, in some cases…may even exceed the value of the company itself," Mark Ugoretz, president of the ERISA Industry Committee, said in a statement. At press time, his group and others were seeking more relief.
So Just How Bad Is It?
A recent report from Mercer offers a bleak diagnosis.
• S&P 500 companies that sponsor pension plans face an estimated $409 billion in pension underfunding for 2008, versus $60 million in overfunding at the end of 2007.
• The average pension plan is likely to be 75% underfunded, down from being 104% funded at the end of 2007.
• As a result, pension funding expenses will increase from $10 billion for 2007 to $70 billion for 2008 — an 8 percent hit to corporate earnings.