Large-company pension plans will weaken this year due to mediocre returns that have not kept pace with growing pension obligations, according to a report by Credit Suisse First Boston.
The investment firm estimated that the defined-benefit plans of the S&P 500 may be underfunded by $218 billion at the end of this year, compared with $165 billion at the close of 2004.
“A flat stock market, combined with a growing pension obligation, does not bode well for the health of defined benefit pension plans,” wrote CSFB. Only a fourth-quarter stock-market rally like last year’s turnaround, or a spike in interest rates at the long end of the yield curve, would prevent an increase in the underfunding level, added the report.
If the pension plans weakened, wrote CSFB, the companies that sponsor them might see their balance sheets deteriorate; pension costs might go up, putting pressure on earnings; and most important, companies might have to contribute more to their pension plans, draining cash. Less capital would then be available to reinvest in and grow the businesses, pay dividends, buy back stock, or pay down debt.
The anticipated deterioration of the large pension funds further drives home the crisis swirling around defined-benefit plans, a great idea decades ago but one that has come back to haunt many old-line companies that are saddled with swelling, relatively unpredictable costs while struggling to thrive in an increasingly competitive global business world.
A number of high-profile bankruptcies at Delta, Northwest, and Delphi are reminders that future retirees may not be able to rely on this payday and that the Pension Benefit Guaranty Corp. may not have ample money to meet these future obligations. This, in turn, has sparked a debate over whether taxpayers without pensions should bail out and fund the pensions of individuals who work for companies that promised pensions but may no longer be able to deliver.
CSFB suggests keeping an eye on the November 10 meeting of the Financial Accounting Standards Board when it may address pension accounting.