Pension shortfalls drain firms' cash
By Christine Dugas, USA TODAY
The unrelenting bear market forced top-tier U.S. companies to pour cash into their sagging pension plans last year, and the financial pain will only worsen if stocks don't stage a lasting rebound soon.
In 2002, 100 of the largest corporations with pension plans contributed $34 billion to their underfunded pensions — more than a threefold increase over 2001, according to a study out Wednesday by pension consultants Milliman USA.
Pension contributions this year are expected to double, says John Ehrhardt, a consulting actuary for Milliman. And it is not something that can be put off until the end of the year: The large pension shortfalls at many companies will trigger rules requiring them to start making quarterly payments this week, he says.
That means companies, already squeezed by the sluggish economy, will have less cash to spend in other areas, such as investing in their businesses or giving raises to workers.
Top contributors
Pension fund contributions in 2002 (in billions):
General Motors $5.16
IBM $4.19
Citigroup $1.24
ConocoPhillips $1.19
J.P. Morgan Chase $1.15
Altria $1.10
3M $1.09
Johnson & Johnson $1.07
United Technologies $1.06
ExxonMobil $0.97
Source: Milliman USA
Not all of the companies making big pension contributions last year did so under duress. "We think many of them were voluntary," says David Zion, a pension accounting expert at Credit Suisse First Boston, who recently completed an analysis of companies in the Standard & Poor's 500 that have pension plans.
Companies make voluntary contributions for a number of reasons, Zion says, such as obtaining tax benefits, improving the health of the plan or avoiding paying a higher premium for pension plan insurance.
In addition, companies sometimes make pension contributions so they don't have to reduce their shareholders' equity, which can be required when pension shortfalls balloon. A charge to equity can cause a credit-rating downgrade or put a company in violation of its loan agreements — either of which can make it harder or more expensive to borrow.
Last year, IBM contributed $4.2 million in cash and stock to its underfunded pension plan. It didn't have to fully fund its plan all at once but chose to do so, saying that based on the strength of its cash flow and balance sheet, it wanted to put the problem behind it.
Not all companies generate enough cash flow to cover their pension contributions. They may have to issue new stock, borrow money or, in extreme cases, sell operations to generate the funds, Ehrhardt says.
Pensions become underfunded when retirement benefit obligations exceed the assets in the pension plan portfolio. During the 1990s bull market, most plans sported surpluses, which helped boost corporate earnings and meant companies avoided making pension contributions several years in a row.
"The '90s were not normal," Ehrhardt says. "Pension contributions and expense are the norm."
Three years of declining stock market returns and low interest rates have eliminated most surpluses. Only 39 companies in the S&P 500 had a pension surplus last year, Zion says. General Electric, for instance, had a surplus of $4.5 billion. Overall, the pension shortfall for companies in the S&P 500 totaled $216 billion last year. |
