COMPANIES TAKE BIG HIT
Pensions come up short by billions
Published: Monday, January 13, 2003 at 6:01 a.m.
Last Modified: Monday, January 13, 2003 at 12:04 a.m.
After a three-year bear market, many large American companies are finding that the financial health of their pension funds has deteriorated, sometimes drastically.
While many businesses are spending big to shore up their plans, many are also considering ways to reduce pension obligations to workers, possibly undermining benefits for millions.
The biggest pension shortfall belongs to General Motors, which said on Thursday that its U.S. pension plans ended the year with a deficit of $19.3 billion, even though the automaker pumped in $2.6 billion. GM also said its pension costs would triple in 2003, severely depressing its profit.
Many similar announcements are expected in the coming months.
These problems have little to do with any change in the number of people retiring, or an increase in their benefits. Rather, investments by the pension funds have fared poorly in recent years. As the prices of stocks and other investments have fallen, so has the return on the money set aside for the more than 44 million current and future private-sector retirees.
At the same time, unusually low interest rates on bonds and other credit investments are further undermining pension plans. Because of the way that interest rates figure in financial calculations, falling rates make future pension obligations look bigger on balance sheets now. To meet their obligations to workers, and to stay in compliance with pension laws, companies have been forced to set aside more money.
IBM put almost $4 billion into its pension plans last month. Honeywell International said in November that it might have to contribute as much as $900 million more. Johnson & Johnson paid in $750 million last month, and 3M made a $789 million contribution last year. Ford said that it contributed $500 million this month and would probably add another $500 million soon, depending on tax considerations.
Still other companies, including Lucent Technologies, Boeing and Delta Air Lines, were forced to reduce their net worth to reflect the way their growing pension obligations had outstripped their assets. Along with reducing a business' value, such steps can put companies in violation of their contracts with lenders. Delta, for one, had to renegotiate with its lenders after the action.
Indeed, concerns about the health of pension plans are making it more expensive for businesses to raise money. That is because credit agencies have lowered their ratings on companies like GM whose liabilities have soared. Even companies whose pension plans remain adequately financed, like Lockheed Martin, have begun reporting lower earnings as the plans' investment performances have declined.
All this is jarring, to investors as well as to employees. Although traditional pensions lost some of their luster when stocks were booming and 401(k) plans seemed to go only up, plenty of companies still offer traditional defined-benefit plans - the kind in which companies promise monthly payments from retirement to death. The bear market has taught employees to prize such pensions once again, because the market risk is absorbed by the sponsoring company and the benefits are insured by the federal government.
With pensions causing so much disruption, companies and the groups that represent them in Washington are considering a range of damage-control measures that could have a lasting impact on Americans' well-being in old age. Whether the most far-reaching measures are taken will depend on how long the current pension squeeze lasts.
For example, companies are considering changes to their pension plans that would reduce their financial obligations. One possibility is converting traditional pensions to "cash balance" plans, which are less costly but have incurred criticism because they can strip older workers of some of the benefits they were promised earlier.
In December, the Bush administration proposed regulations that would make it easier for companies to change to cash balance plans without setting off age-discrimination suits.
Another possibility is eliminating lump-sum payments from plans that offer workers the option of taking their retirement benefits all at once, forcing retirees to take their money as a series of payments over the rest of their lives.
Lump-sum payments are unusually costly for employers now because, again, of the effect low interest rates have on calculating benefit values. When rates are low, lump-sum payments swell, giving today's retirees a premium if they take all their money at once.
"Lump sums are 10 to 20 percent larger now than they would have been" if interest rates hadn't fallen to present levels, said Ron Gebhardtsbauer, a senior pension fellow at the American Academy of Actuaries.
Eliminating the option, which is offered by medium-size companies more often than large corporations, would anger older workers and would be difficult without violating a federal law that prohibits stripping workers of retirement benefits already earned.
Today, about 360 companies in the Standard & Poor's index of 500 large corporations - and many more smaller companies and nonprofit organizations - sponsor one or more pension plans. About 44 million Americans are either receiving pensions or will qualify for them when they retire. (This figure does not include millions of workers who participate in various government pension plans.)
The growing concerns about underfinanced pensions do not mean that all plans are in trouble. As recently as 2001, many plans still had surpluses, though many of those surpluses will probably prove to have vanished when companies file their financial results for 2002 in the next few weeks.
Even deficits are not a sign of imminent trouble, since many workers at the companies with underfinanced plans will not retire for years, giving their employers time to make up the shortages. The laws that require companies to shore up deficient plans have considerable wiggle room, permitting contributions to be stretched out over several years. Companies can also, in many cases, contribute to plans in their own stock, as Northwest Airlines requested federal permission to do in November.
To a great extent, the companies with ailing pensions are confined to a few categories: some large corporations with unionized workers; declining old-line industries that must somehow generate enough cash to pay the pensions of many retirees; and once-regulated sectors like power generating, in which government boards formerly set prices and built in assumptions about generous pension benefits that today's deregulated markets will not accommodate.
The sickest pension plans, by far, are at steel companies, followed by airlines. Other ailing sectors include the auto industry and its suppliers, the rubber and tire industries, and telecommunications.
At worst, the need to make a large, mandatory pension contribution can push a company with insufficient cash flow into bankruptcy.
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