Pension Losses Will Devour Corporate Earnings
Consulting firm Mercer reports pension plans have suffered their steepest one-year drop in 20 years, and companies are squeezed for cash to make up the shortfall
Pension plan losses are about to knock out $70 billion of corporate earnings, according to a report by consulting firm Mercer. Huge investment losses have left the funds of the Standard & Poor's 1500 some $409 billion in the red, the firm estimates in a report released Jan. 7. More than fully funded a year ago, these plans have suffered their most precipitous one-year drop in at least two decades, with the average fund now holding enough assets to cover just 75% of promised retirement payouts.
It was more bad news for corporations on a day when Time Warner (TWX) announced a $25 billion charge, Alcoa (AA) said it would eliminate 15,000 jobs, and Intel (INTC) warned that its revenue would likely fall short of expectations. "Companies will need to make a choice between funding the pension plan and investing cash in the business," says Adrian Hartshorn, a member of the group that assembled the report. The report described the downturn in the plans as an "alarming deterioration."
Funding pensions, Hartshorn says, will likely impact companies' other capital expenditures. And because of its impact on employers' balance sheets, these pension shortfalls will be looked at by credit rating agencies and could possibly impact loan covenants.
Not surprisingly, companies have already begun lobbying to put off the requirements to make these cash contributions. But even if they get some relief from Congress, it seems likely that workers will not. They are almost certain to see a hit to their benefits. Many of the 772 companies that sponsor traditional pension plans also have 401(k)-style plans, and managers could well stop making matching contributions because that's easier than altering a traditional pension plan. Those that have not already closed their defined benefit plans to new entrants may well do that now, too, Hartshorn says.
Manufacturers topped the list of the troubled firms in an Oct. 9 report by UBS (UBS) equity strategist David Bianco. Bianco estimated Ford Motor's (F) pension shortfall at $12.8 billion, or 193% of its market cap at the time. Unisys (UIS) and Goodyear Tire & Rubber (GT) also have high levels of underfunding.
For all of these companies it's a bad time for more bad news.
Byrnes is a senior writer for BusinessWeek in New York.