The pension funding problem is one that seems to be in the background of most discussions of the economic crisis but it is nevertheless a very significan issue as this article shows. Present day workers face the prospect of fewer pension benefits and existing plans will be in jeopardy unless the market turns around and rebounds significantly within a few years. However, it is not clear how likely that is.
This is from the Washington Post.
2008 Leaves Pensions Underfunded
Stock Losses Leave $400 Billion Deficit; Shoring Up Funds May Be Costly
By David S. HilzenrathWashington Post Staff WriterThursday, January 8, 2009; Page D01The collapse of the stock market last year left corporate pension plans atthe largest companies underfunded by $409 billion, reversing a $60 billionpension surplus at the end of 2007, according to a study released yesterday.Shoring up the plans could cause further pain for workers, businesses andthe struggling economy at a time when they can least afford it, pensionspecialists said."The chaos that has been observed in the world's financial markets over thelast 12 months has had a major adverse impact on pension plan funding andwill negatively impact corporate earnings," the Mercer consulting firmreported yesterday. "Moreover, the trend in recent months has been one ofalarming deterioration," Mercer said.As Mercer and other pension specialists described it, the pension problemillustrates how the recession and the meltdown in the financial markets canbecome self-reinforcing.Ballooning pension deficits will leave some companies with diminishedprofits, weaker credit ratings and higher borrowing costs, which cantranslate into lower stock prices, said Mercer principal Adrian Hartshorn.The need to cover pension shortfalls could prompt businesses to reducespending on items as varied as equipment that boosts productivity anddividends that deliver income for shareholders.Though shoring up pension funds is supposed to increase employees' financialsecurity, it could involve such tradeoffs as reductions in wages, benefitsand jobs, said Mark J. Warshawsky, director of retirement research atconsulting firm Watson Wyatt Worldwide.In a further irony, it could also prompt companies to freeze the amount ofpension benefits employees can accrue, Warshawsky said.But the overall economic effects may be more complicated, pensionspecialists said. Filling the gaps will force companies to boost theirpension investments, contributing to demand for stocks and bonds.Mercer's monthly snapshot of corporate pension plans focuses on thoseoffered by employers in the Standard and Poor's index of 1500 bigcorporations, and it uses the accounting methods that companies must followwhen they prepare their financial statements. Mercer estimated that the S&P1500 pension plans held enough assets overall to cover only 75 percent oftheir obligations, down from 104 percent at the end of 2007. Precise figureswon't be available until companies issue their annual reports for 2008 inthe coming months.Pension deficits are far from unprecedented. As recently as March 2003, thefunding level for plans in Mercer's study was 73.2 percent.When pension plans are underfunded, companies are required to plow enoughadditional money into the funds each year to correct the imbalance, aprocess than can take several years. This year, Mercer estimates that thecompanies in its study will end up reporting about $70 billion of pensionexpenses, up from about $10 billion in 2008. That would equate to an 8percent reduction in annual profits compared with 2007, the most recent yearfor which companies have reported full annual results, Mercer said.Watson Wyatt looked at the issue from a different angle but found a similartrend. It tried to assess in aggregate the condition of all pension planssponsored by individual corporations in the United States, and it used adifferent set of measures -- the rules that govern the actual amount of cashcompanies must put into their pension funds.Watson Wyatt estimates that corporate pension plans began 2009 with $1.63trillion in assets and $2.12 trillion in liabilities, Warshawsky said. Thefirm estimates that companies will have to more than double theircontributions to pension plans this year, to $111.2 billion from $50.5billion in 2008, he said.Both Mercer and Watson Wyatt advise companies on employee benefits.Some business groups have been calling for relief from the federal law thatwould force them to boost pension fund contributions in the short run, andthe government has already eased some requirements. Relaxing therequirements could entail another compromise -- the health of the pensionplans.Even before the current recession, traditional pension plans that promisefixed retirement benefits were an endangered species for workers in theprivate sector. "As U.S. manufacturing and the U.S. organized laborfootprint have contracted, the defined benefit plan has contracted," saidthe Brookings Institution's J. Mark Iwry, a former pension system regulator.Pensions have largely been supplanted by 401(k) plans, which offer noguaranteed payouts.Like pension funds, Americans' 401(k) accounts have generally plummeted overthe past year, and some companies have added to the strain by cuttingmatching contributions.Whether the responsibility rests with corporate pension fund managers orindividual employees managing their accounts, the nation's ability toconvert relatively low savings rates into comfortable retirements depends oninvestments not merely outstripping inflation but delivering strong andstable returns over the long run. That proposition has been sorely tested oflate.Keith Ambachtsheer, an adviser to pension funds, says the nation may be instore for "a radical rethinking of how we deliver pensions to private-sectorworkers."Increasingly, the burden may fall to taxpayers, as it has with other aspectsof the nation's financial troubles, said Kent Smetters, an associateprofessor at the University of Pennsylvania's Wharton School.When companies go bankrupt and are unable to shoulder their pensionobligations, the federally chartered Pension Benefit Guaranty Corp. steps inand covers the shortfall, subject to legal limits that would leave manyhigher-paid workers with smaller pensions than they had been promised.The PBGC is funded through insurance premiums paid by employer-sponsoredpension funds, but Smetters predicted that the PBGC eventually will need afederal bailout.As of Sept. 30, when its last fiscal year ended, the PBGC reported a deficitof $11.15 billion.