US pension plans fall into deficit
Monday April 21, 6:10 am ET
By Elizabeth Wine in New York
The 100 biggest US corporate pension plans have fallen into a deficit of $157bn from a surplus of $183bn in 2000, says Milliman USA, a benefits consulting firm.
Due to the sharp fall in the stock market and falling interest rates, many pension plans - including those of General Motors, IBM and Ford - lost money on investments at the same time as liabilities were increasing.
The combination of events was "the
perfect storm" for pension plans, according to John Ehrhardt, one of the authors of the report.
The study reviewed the 100 biggest defined benefit pension plans in the US, which had total pension assets of $732bn at the end of 2002. It found that surplus assets declined by $172bn in 2002, after losing $168bn in 2001 - a $340bn loss in funding over the last two years.
Surplus assets evaporated in 2001 and 2002 as the bear market ravaged equity portfolios. General Motors, the largest US pension plan, lost $13bn in 2002, after losing $12bn in 2001.
Of the 100 companies surveyed, 87 had a deficit in 2002, compared with 60 in 2001 and just 20 in 2000.
Even General Electric, one of 13 companies in surplus, has seen its surplus cut to $4.5bn in 2002, down by more than 75 per cent from 2000.
This meant an increase in contributions companies had to make to pension plans, up to $33.6bn in 2002, more than tripling from $9.2bn in 2001. Milliman expects those contribution levels to remain high this year.
But Mr Ehrhardt cautioned that the idea of companies contributing to their pensions does not bode ill for their financial health. He said that the large surpluses companies enjoyed in the 1990s bull market were not a normal state of affairs. He said that on average, pension plans ought to cost companies between 5 and 10 per cent of payroll.
The ratings agencies have taken note of companies' increasing need to allocate cash to cover their pension obligations. Standard & Poor's on Tuesday placed 12 US companies on negative credit watch because of concerns about the unfunded benefit liabilities.
Milliman says the plans themselves are still healthy, but no longer have the money to cover 100 per cent of pension liabilities, which includes the pensions of employees who are still working.
That does not mean that retirees will not be paid full pensions. It does mean the companies will have to put in some of their own cash to cover the difference. That is a sharp change from the days of the bull market, when the companies enjoyed a surplus and were able to generate profits from their overfunded pension plans.
The study also showed the after-tax charge to shareholder equity grew by more than $62bn in the last two years, to $81bn at the end of 2002. Of the companies surveyed, 18 reported a charge of more than $1bn. That compares with just one company in 2001. |
