Pension-Plan Pit: Companies
Face Shortfalls in Nest Eggs
The S&P 500 Firms With Retirement Plans
Will Need $243 Billion by 2003, Study Says
By CASSELL BRYAN-LOW and ROBIN SIDEL
Staff Reporters of THE WALL STREET JOURNAL
Ford Motor Co. and General Motors Corp. aren't the only big companies seeing cracks in their pension-fund nest eggs.
Concerns about pension liabilities this week contributed to steep selloffs in the stocks and bonds of the nation's biggest auto makers. Acknowledging the impact of the recent stock-market slump, both Ford and GM have signaled that they will likely lower the assumed rate of return for their huge pension trusts later this year, a move that could cut into earnings.
Perhaps more important, both may need to contribute billions of dollars to their increasingly underfunded plans, even as they could well use their cash for other purposes.
A new study by Credit Suisse First Boston indicates that those companies may not be alone. The report, which looks at the 360 companies in the Standard & Poor's 500-stock index that have pension plans, estimates that, by year's end, the companies will have assets to cover only 79% of their liabilities. All together, the companies face a $243 billion pension shortfall, based on estimated obligations of $1.15 trillion and assets of $904 billion, according to CSFB.
It is the first collective shortfall for the S&P 500 companies since 1993, according to another new report, from UBS Warburg.
The upshot: The contributions holiday of the late 1990s that many companies enjoyed as a result of the long bull market is now grinding to a halt. And with the stock market down so sharply from its peak, it will take an unusually strong rebound for the companies to go back on holiday anytime soon.
As pension deficits grow, the concern is to what extent the shortfalls will lay claim to future earnings as companies divert cash to shore them up. In general, companies are obligated to make contributions when reserves fall below about a 90% threshold for three years. And, when companies dip into cash flow that could otherwise be used for investments to drive growth, investors' hopes for a broad economic recovery dim.
"Investors are concerned about the increases in cash contributions that the companies would have to make to their pension plan if their funded status continues to decline," says David Zion, author of the CSFB report. So far, the impact has tended to be limited to specific sectors such as transportation.
"Generally old-line, heavily unionized companies could experience a decline in earnings, a deterioration in the balance sheet and, for some, a drain on cash flow," says Mr. Zion. In addition, S&P is evaluating potential credit-rating implications.
How quickly fortunes have changed for the S&P 500 pension plans. In 2001, obligations were roughly equal to assets, according to CSFB, while in 1998 assets totaled $1.15 trillion, far exceeding obligations of $897 billion.
Which companies now face some of the steepest obligations? The CSFB study ranked the largest underfunded pension plans relative to current market capitalizations and concluded that 14 companies are on track to end this year with pension funds short by a value equivalent to 50% or more of their current market cap, as of Sept. 24.
Topping the list are American Airlines parent AMR Corp., Fort Worth, Texas, and Atlanta-based Delta Air Lines. CSFB estimates AMR will be underfunded by $3.37 billion at year end, a sum that is more than six times greater than the company's current market cap. Delta is estimated to be underfunded by $4.38 billion, or more than 3½ times its current market cap. Avaya Inc., Goodyear Tire & Rubber Co. and GM round off the top five.
To be sure, the volatile market could rally by year end, and the reports are based on multiple assumptions beyond the performance of the market over the next several months. Goodyear spokesman Keith Price says that "if the stock market turns around and gains some traction, both the underfunding and the market-cap calculations can change considerably."
Goodyear, whose pension plan CSFB estimates will be short $1.97 billion by year's end, recently contributed $140 million of stock to that plan. The contribution was made "even though we aren't required to make any contributions until 2004," Mr. Price says.
GM already is channeling cash generated from the auto business into its pension funds, and the big auto maker estimates it may have to contribute as much as $12 billion to the plans over the next five years. Some analysts think that figure could be even higher, especially since the obligation is based on the assumption that the funds have a break-even return this year and annual gains of 8% to 10% starting in 2003.
Investors are likely to get a better sense of those obligations next week when GM reports third-quarter earnings. At the end of last year, GM's pension funds had $67 billion in assets. Returns on those assets fell 3% in the first half of 2002.
CSFB estimates GM's deficit will widen to $29.4 billion by the end of this year. GM has said that its pension plans were underfunded by $9.1 billion at the end of 2001, and has estimated that if pension returns are down 5% this year, that amount could grow to $16 billion. "We acknowledge this is a meaningful challenge, but it is also a manageable challenge," says GM spokesman Jerry Dubrowski.
Ford's plan will be underfunded by $14.3 billion by year's end, estimates CSFB. Ford has said that as of June 30 the underfunding stood at $3.2 billion. It also said that the plan's investments were down 6.7% for the first six months. Given that performance figure along with further market declines, company spokesman David Reuter says Ford doesn't expect the fund to see a positive rate of return for the year. Mr. Reuter declines to comment on CSFB's estimates.
Some companies are quick to note that when obligated to make contributions, they are required to do so only in increments over several years. Avaya, whose pension fund CSFB estimates will be underfunded by $703 million by year end, expects to pay $60 million to fund its pension plan in 2003, a portion of which will be subject to an assessment of the value of the plan's assets this coming Jan. 1. An Avaya spokeswoman declines to comment on the report.
AMR spokeswoman Andrea Rader says, "At American, we're watching our pension obligations closely." She adds the company has funded the plan this year and that it is "in line with government and accounting regulations." Delta spokesman Tom Donahue declines to comment on the CSFB report, citing the company's coming earnings release. |
