Company Pensions Need $109 billion in Cash

Posted by: Nanette Byrnes on January 13, 2009

The bad news just keeps getting worse for companies that offer workers a traditional pension plan.

According to pension experts at consulting firm Watson Wyatt, companies with defined benefit pensions are going to have to come up with $109 billion in cash to shore up their pension plans this year. And another $103 billion next year. That’s up from $38 billion in 2007.

Plans with assets worth less than 80% of their liabilities (and there will be plenty of them) will be hit with an additional $3.2 billion in penalties.

The main culprit is sharp losses in the investment pools set up to pay these obligations. But recent changes in accounting rules have added to the pressure, forcing fund manager to quickly mark those assets to market prices and fill shortfalls.

Last week consulting firm Mercer published an estimate that companies will suffer a $70 billion earnings haircut due to their pension plan investment losses.

But while down earnings hurt, doling out precious cash is much more painful these days. Especially for strapped companies finding corporate credit as rare these days as a ticket to the inauguration.

The new administration won’t have long to settle in before companies come calling looking for pension relief. Employers want changes to the new rules pushing them to fund up quickly. Their primary goal: slowing the rate at which assets must be marked to their current dismal levels.

Such changes won’t erase the problem entirely. Employers would still have to pay a big pension bill: $68 billion in 2009 and $87 billion in 2010, Watson Wyatt estimates.

Without some relief, pension plans are in jeopardy the experts warn. “As contributions jump, employers may be forced to make tough choices to cut costs,” said Mark Warshawsky, director of retirement research at Watson Wyatt. “We hope that with more temporary funding assistance, employers will still be able to provide defined benefits plans and their employees will continue to enjoy retirement security.”

Reader Comments

Vince

January 14, 2009 8:33 AM

goes to show you at the end of the day, we have to all watch our own backs, because the big 500 aint gonna do it. Save and invest wisely.

Mmartins

January 15, 2009 10:43 AM

In defined contrubution plans, the risk is taken by the fund, and by who invets in it. In theory, that is. When there is a slowdown, or a recession as in this case, the underfunding of the plan is addressed by none, least of all the companies that have fallen into the hardships of a recession, So that risk is taken by the beneficiary, who pays the underfund by not receiving his or her pension. In defined contribution you do receive less if you (or whoever contributes) do not reinforce your installments. The difference is that you know (or you shoud know) that from the start, and you do not end up amidst a legal battle or a painful ruin.MMartins-Portugal

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