Human Capital & Careers

Needed: $36 Billion in Pension Contributions

Pension plans of S&P 500 vastly underfunded; same story for federal agency that backstops pension plans.
David KatzJune 11, 2003

Underfunded defined-benefit pension plans sponsored by Standard & Poor’s 500 companies could require a boost of about $36 billion in the next 16 months.

This according to a study of defined-benefit plan disclosures in the 10-K filings of the constituent companies of the S&P index. The research, which was conducted by turnaround specialist FTI Consulting, examined GAAP pension data and disclosures for fiscal 2002.

The study found that most of the companies in the bellwether index would have to inject funds into their plans this year. Out of 354 S&P 500 corporations offering defined-benefit pensions, 215 will likely need to make added contributions in the next 16 months, predicts FTI.

Some pension sponsors will endure some pretty hefty hits, too. For 19 of the S&P 500 companies, funding requirements will top 30 percent of their most recent fiscal year’s free-cash flow. The study’s authors also predict those companies will have to insert 30 percent of their cash balance (or net working capital, if greater) into their defined-benefit funds.

Where will the companies get the cash? Not from current resources or operations, since the study singled out companies that don’t have them, said Dominic DiNapoli, who supervises the consulting firm’s restructuring practice. The companies, he thinks, might need to divert funds from reinvestments or shareholder distributions, or draw on bank lines of credit.

Pension Insurer Might Shy from Stocks

In other pension news, the federal corporation that provides a backstop for pensions could be changing its investment strategy. The Pension Benefit Guaranty Corporation (PBGC) is performing the first review of its investment strategy in a decade, according to the Financial Times.

At stake: PBGC’s $26 billion investment portfolio—and maybe more. If the agency moves to a fixed-income strategy, pension fund sponsors might get the notion that PBGC thinks that stocks can’t produce the returns needed to pay benefits, according to the FT.

Officials at PBGC, however, have reason for caution. For the fiscal year ended September 30, 2002, PBGC’s insurance program for individual employers went from a surplus of $7.7 billion to a deficit of $3.6 billion. The loss was more than five times the size of any previous one-year loss in the agency’s 28-year history. Based on the agency’s midyear unaudited financial report, the deficit has grown to about $5.4 billion.

At the same time, PBGC isn’t backed by the full faith and credit of the U.S. government and gets no federal tax dollars. Instead, the agency is funded by insurance premiums paid by defined-benefit pension sponsors, along with pension assets that PBGC recovers from bankrupt sponsors and earnings on its invested assets.

You can understand why officials of the PBGC want to take a fresh look at where they plunk down the agency’s money.