Human Capital & Careers

Report: Pensions Plunge by $170 Billion

A rough year is erasing gains from the last five and may force companies to spend more on their plans.
Alan RappeportJuly 24, 2008

The value of pension plans for S&P 500 companies has plunged by $170 billion thus far this year, reducing a $60 billion surplus from 2007 to $110 billion deficit, according to research by Credit Suisse.

Defined-benefit pension plans have been stung by the turbulent equity and bond markets this year. Plans rely on solid returns to meet their payout obligations, so declining asset values hits them especially hard.

With the steep decline in asset values so far this year, “pension plans may have given up some of the hard earned gains from the past five years,” the report said.

The most painful impact may be on the balance sheets of corporate pension sponsors. The funded status of pensions appears on company balance sheets and must be marked-to-market annually, showing the extent of a fund’s decline. Also, pension costs that rise beyond expectations could put added pressure on earnings, and companies may have to contribute more to the plans, according to the report. In turn, that could detract from money that could otherwise be used to pay dividends or service debt.

“If the plans get weaker the companies that sponsor them could get hit from a number of angles,” the report said.

Struggling pension funds affect all companies differently, depending on their exposure, the researchers observed. Some companies, such as General Motors, Ford, Eastman Kodak, and Goodyear have benefit obligations that are larger than their market capitalizations, according to Credit Suisse.

Credit Suisse’s projections for 2008 are based on market performance so far this year, in which equity prices are down by 10 percent. Companies have been shifting where they allocate their pension fund assets in the last year, reducing their exposure to the equity markets and investing heavily in fixed income.

This year’s pension problems began in January, when 100 of the biggest U.S. companies saw their defined-benefit plans lose more than a full year of 2007 gains in the first month of the year, when funded status fell by $63 billion, according to Milliman, a pension actuarial firm.

Last year companies with big pension plans enjoyed the income-statement effects of a hefty cut in plan costs. With big asset losses of 1999 through 2002 having mostly worked their way through the pension system, plan expenses dove by $19 billion, boosting company earnings by $8 billion, Milliman found.