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|  | DECEMBER 19, 2005
 MARKET VIEWS By Howard Silverblatt America's Other Pension Problem[Page 3 of 3]CARMAKERS' GRIPE. Current medical and OPEB costs have risen substantially over the past decade and now occupy a significant position in U.S. labor contracts. The current public focus has turned to the U.S. auto industry. During more prosperous times, the ability to pass through additional costs to customers permitted increased benefits. However, due to lower market share resulting from lower sales and profits, these benefits now stand out as a major difference in competitive pricing. The U.S. auto industry has long contended that current medical and OPEB costs have contributed to an international disadvantage in the marketplace. With almost $94 billion in underfunded OPEB obligations, Ford (F ) and General Motors (GM ) represent more than 32% of the aggregate S&P 500 OPEB underfunding, compared to their 13% of the underfunded pensions. Pensions and OPEB have become the major issue within the telecommunications sector as well. The PBGC guarantees pensions for 44 million people (34 million under single pension funds, 10 million under multi-employer funds). Each person is guaranteed up to $45,614 per year, which is indexed and adjusted annually. In November the PBGC reported that the plans it has taken over were $23 billion underfunded. While observers expect some of this shortfall to be made up for by increased premiums paid by covered companies (expected to be enacted by Congress), the U.S. government will have to make up any deficit. OPEBs have no such protection or requirement. CLARIFYING THE RULES. This weighs as an extremely important distinction. The ability of companies to modify their plans (subject to contractual obligations) speaks directly to the extent of their legal obligation to fulfill them. This has been widely discussed for years, with one of the main points being an attempt to measure the extent of a company's OPEB obligation (both as an ongoing concern or under court direction). Within the S&P 500, more than 12 million employees receive coverage from OPEB plans, with multiples of that consisting of either dependants or retirees. The size and potential impact of any change to these programs makes the issue politically charged and relevant to the nation at large. The change in accounting rules under Phase 1 of the FASB plan will reflect a clearer understanding of the cost of salaries and benefits. While these liabilities always existed, the transfer from the footnotes to the balance sheet will create a greater investor awareness of the obligation, and (we hope) increase participation in the upcoming discussion on Phase 2. The impact of moving $442 billion onto the balance sheet (regardless of how it is classified) will mean reduced common tangible book value in the S&P 500 by 21%, representing 70% of 2005 expected as-reported income. It would increase several leverage metrics that add such costs into long-term debt by 10%. SPIRITED DEBATES AHEAD. Long-term OPEB costs have, and are continuing to, increase substantially. Aided by an attempt to reduce the number of employees, many companies have encouraged early retirement, adding to the coverage period. Medical advancements combined with more expensive drugs have also permitted retirees to live longer. These costs will need addressing. The discussion regarding pensions and OPEB will prove lively, political, and complex. However, for capital markets to function properly, sufficient timely data, similar to earnings reports, are necessary. The complexity of the issue is as enormous as its impact on companies, employees, and retirees. Standard & Poor's is reviewing the FASB proposal and evaluating additional information. Pensions and OPEB have moved well beyond individual companies. Their importance in the global economy is now self-evident. This report was prepared by the Standard & Poor's Index Analysis & Management Group, which is separate from the Standard & Poor's Credit Market Services Group (fixed income) and separate from Standard & Poor's Equity Research Services. This report does not discuss ratings or credit market aspects and does not make any buy/hold/sell recommendations for any securities.
 Silverblatt is equity market analyst for Standard & Poor's All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report. Standard & Poor's Regulatory Disclosure Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.
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