Study Details Pension Plan Shortfalls
Most of the companies in the Standard & Poor’s 500 index that offer traditional pensions to their workers had unfunded obligations to those plans at the end of last year, thanks in part to the relentless bear market, according to a study released Thursday.
The pension shortfall, averaging nearly $10,000 per covered employee, could have a serious effect on corporate earnings, S&P; analysts warned.
“After three down years, [companies] are having to make cash infusions into the pension plans, resulting in a cash flow drain which can negatively impact earnings and capital expenditures,” said Howard Silverblatt, the S&P; equity analyst who conducted the study.
Of the companies in the S&P; 500 -- a benchmark stock index that includes 500 of the largest U.S. companies -- 343 offer traditional defined-benefit pensions to their workers. Of those plans, nearly 90% are in the red, according to S&P.; Just 35 plans show a surplus or are at break-even.
Of the 29 California-based S&P; 500 members that offer defined-benefit plans, 26 had underfunded plans at year’s end, S&P; found.
Because traditional pension plans promise workers monthly payments for life, government rules require companies to estimate their future pension obligations and hold enough money in savings and investments to fund that future cost. But pension funding is affected by how long retirees are expected to live, employment trends and the performance of the stock and bond markets, where most pension assets are invested.
The three-year bear market has taken its toll, Silverblatt said.
In 1999, the S&P; 500 companies that offered defined-benefit pensions had a total pension surplus of $251 billion. By the end of 2002, they had a cumulative shortfall of $206 billion, he said.
If the market turns around, some of the shortfall may be addressed without hurting company earnings. If it doesn’t, companies will have to use money that would otherwise go to fund research or growth to shore up pension assets, experts said.
“It all stems from the market,” said Tom Morrison, senior vice president at the Segal Co. in Glendale. “Companies are going to see a significant increase in the cost of providing the same benefit that they provided years ago, just because of market conditions.”
Some companies already have taken a hit -- and some anticipate that future financial results might be affected.
El Segundo-based Unocal Corp., for example, took an after-tax charge of $334 million against shareholder equity in the fourth quarter of 2002 to account for pension costs, according to filings with securities regulators. S&P;’s analysis pegs Unocal’s continuing unfunded pension liability at $315 million.
However, Unocal spokesman Barry Lane said the company doesn’t anticipate having to put additional cash into the pension for at least two years.
Rosemead-based Edison International, which S&P; says has a $395-million shortfall, also took a hit to shareholders’ equity in 2002. Depending on what happens with investment returns and other factors, the company may take another hit in 2003, the company said in a statement filed with securities regulators.
Even a small upswing in market returns can have a dramatic effect on pension plans.
Bank of America Corp., based in North Carolina but the biggest retail bank in California, had a $109-million shortfall at the end of 2002. Because investment returns were better in the first quarter than they had been in the past, and because BofA has $7.3 billion set aside in its plan, the $109-million shortfall has been wiped away and the plan now shows a modest surplus, a spokesman for the banking company said.
Nationally, the companies with the biggest pension shortfalls at the end of 2002 were the big automakers, which already have signaled that pension funding will play into future earnings. Among California-based members of the S&P; 500, the companies with the biggest shortfalls were Northrop Grumman Corp. at nearly $3 billion, Hewlett-Packard Co. at $2.66 billion and ChevronTexaco Corp. at $2.64 billion.
But things aren’t always as bad as they appear, said Bob Bishop, a Northrop spokesman.
“We don’t see a significant earnings impact because we typically project the pension contribution requirement and include those costs in our prices,” Bishop said.
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Pension funding
Of the 29 California-based companies in the Standard & Poor’s 500 index that offer traditional pensions to their workers, most have major unfunded obligations to the plans.
*--* Company Amount plan is overfunded or underfunded (in millions) Northrop Grumman -$2,992 Hewlett-Packard -2,660 ChevronTexaco -2,636 Agilent Technology -654 PG&E; -592 Edison International -395 Unocal -315 Sempra Energy -306 Computer Sciences -278 Knight-Ridder -245 Walt Disney -231 Wells Fargo -153 Intel -107 Occidental Petroleum -106 WellPoint Health -99 Clorox -90 Countrywide Financial -85 Fluor -67 National Semiconductor -54 Allergan -51 Avery Dennison -47 Charles Schwab -29 Mattel -19 Franklin Resources -17 Chiron -12 Hilton Hotels -4 Power-One 0 McKesson +15 Safeway +53
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Source: Standard & Poor’s
