Human Capital & Careers

Pension Plan Plunges Spread Corporate Pain

Deficit of the S&P 1500's plans has hit a record $280b, versus a $60b surplus at year-end. Balance-sheet damage and higher pension expenses are fol...
Stephen TaubDecember 2, 2008

The pension plans of the 1,500 largest U.S. companies lost $130 billion in November alone, according to benefits consultancy Mercer. This came on top of $110 billion in losses in October and $100 billion for the first three quarters of the year.

As a result, the deficit of the pension plans of companies that comprise the S&P 1500 has hit a record $280 billion. That contrasts with the surplus of $60 billion reported at the end of 2007.

Looked at a different way, the aggregate funded status fell from 104 percent at the end of 2007 to 80 percent at the end of November. It stood at 97 percent as recently as the end of September.

“Falling equity values and falling corporate bond yields have resulted in the sharpest decline in funded status in more than a decade,” said Adrian Hartshorn, a member of Mercer’s Financial Strategy Group, which helps companies manage financial risk in their retirement programs.

Of course, equity values have been plummeting all year. But Mercer noted that that the impact on pension plan funded status was cushioned by rising corporate bond yields between January and September. While rates continued to increase in October, though, November saw a decrease in corporate bond yields.

The decline in funded status will hurt companies several ways. Companies will need to reflect the pension plan deficit on their balance sheet, for example, Mercer explained. The reduced balance sheet strength may have consequences for several areas of the business, including capital expenditure decisions, loan covenants and credit rating decisions, it added.

Further, the pension expense that companies report in financial statements will likely be significantly higher in 2009, reducing corporate profitability and reported 2009 earnings, Mercer added. And companies will be having to make higher cash contributions, as well.

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