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You thought it was just state and local governments facing pension meltdowns.
But new footnote disclosures required by regulators show many companies in the S&P 500 face huge problems with their pension plans — 329 companies in the S&P had total underfunded pension balances of $288 billion, says Jack Ciesielski at the Analysts’ Accounting Observer, which tracks corporate profit reports.
That $288 billion underfunded number could increase by another $167 billion due to, get this, the Federal Reserve’s record low interest rates enacted to save the banks, as well as toxic assets, Ciesielski says.
On average, 355 companies out of the S&P 500 have pensions, and they are now, on average, 78% funded, versus 94% in 2007, Ciesielski says.
Fed interest rate cuts are killing the likes of Allegheny Energy, Harley Davidson, Hershey and Tenet Healthcare, Ciesielski says.
Ciesielski is well regarded at the Securities and Exchange Commission, and has sat on advisory accounting panels at the Financial Accounting Standards Board, which sets the rules for how companies report their profits, as well as the SEC Regulations Committee of the American Institute of Certified Public Accountants.
Meanwhile, Mercer, a corporate consulting group, looked at a broader group of S&P companies and arrived at findings similar to Ciesielski’s.
Mercer says declining stock markets and interest rate cuts have dropped the aggregate funding ratio for S&P 1500 companies' pension funds to 71% in August. That’s a steep four percentage point decline from July, increasing the underfunded amount by $76 billion, to a combined $506 billion, says Mercer.
Mercer adds the underfunding is the largest ever recorded by the broader S&P 1500 company index since it began tracking these plans in 1999, “and is also more than double their 2009 year-end deficit of $247 billion,” according to a Mercer news release.
The FASB has also cited a study of the largest pensions at more than 100 US companies. At year-end 2008, these pensions were underfunded by $160 billion — or about 44% of their total liabilities.
This problem matters for investors, not just workers and taxpayers. If the low-funded status persists for the rest of 2010, “companies' net balance sheet liabilities and income statement expense for 2011 will increase significantly,” says Gordon Young, a Mercer retirement plan expert, in the news release.
Mercer estimates the aggregate value of pension plan assets of S&P 1500 companies was $1.27 trillion, versus aggregate liabilities of $1.77 trillion. The aggregated value of S&P 1500 companies' pension plans at Dec. 31, 2009, was $1.25 trillion, compared with aggregate liabilities of $1.5 trillion.
Companies can unplug their pensions, which is a long and messy process. Or they can try to unload their insolvent plans onto the federal Pension Benefit Guaranty Corporation (meaning taxpayers) if they’ve been paying the coverage fees into this government unit.
But a lot has to happen first — for one, the company has to go broke.
And what this means for investors, taxpayers and workers is that, before going broke, “companies typically either lever up to meet plan payouts, as in General Motors, or try to cut benefits to the extent that the contracts allow, or try to muddle through and pray that [stock] market returns increase,” says Fox News analyst James Farrell.
The PBGC reported a year-end deficit of $21.9 billion, Farrell notes, nearly double the $11.2 billion deficit reported at the close of fiscal year 2008.
Remember, when it comes to pensions’ promised benefits, “these are all actuarial valuations -- current value of future assets minus current value of future liabilities,” says Farrell. “Clearly not good, but not ‘the sky is falling, we will have old ladies eating cat food tomorrow’ time.”
Digging into pension assets, Ciesielski found shaky Level 2 debt securities comprising 55% of S&P plan assets.
Toxic Level 3 securities — assets that are so iliquid that management essentailly guesses their worth — comprised about $1 out of every $10 S&P plan dollars.
Under accounting guidelines, companies must report separate buckets for their assets, showing the quality of their valuations, from levels one to three.
These assets are scariest to investors and workers because they are best guesses — if values plunge, then a company would either have to lever up to fix the plan or kill it entirely, Ciesielski says.
Median lifespan of an S&P 500 plan? Just 12 more years, Ciesielski says.
Which S&P companies does Ciesielski estimate will see their pensions go bye-bye due to severe underfunding? Omnicom Group (2 years left), JDS Uniphase (2 years left), KLA-Tencor (3 years left), Macy’s (6 years left) and Whirlpool (7 years left).
Ciesielski also runs R.G. Associates, an asset management business “focusing on firms with long-term successful operations with above-average operating cash returns on total invested capital, just trying to practice what [Warren] Buffett used to preach,” he says.
Elizabeth MacDonald is the stocks editor for Fox Business Network. She is recognized as one of the top prize-winning business journalists in the country, and has received 14 awards, including the top prize in business journalism, the Gerald Loeb Award for Distinguished Business Journalism, and the Newswomen's Club of New York Front Page Award for Excellence in Investigative Journalism.
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