Merrill Report Fans Pension Funding Fears

A Merrill Lynch report said that a third straight year of slumping stock values is likely to weigh heavily on the earnings of the S&P 500 companies next year.  According to Reuters, Merrill Lynch estimates that the traditional pension funds of nearly all (98%) of 346 S&P 500 companies are expected to be underfunded at the end of 2002 – companies that comprise 70% of the index.

Under Funded

On aggregate, the pension funds of those firms are expected to be underfunded by $640 billion – 69% of the total assets in their pension plans, according to a Merrill Lynch analyst’s study.  Excluding post-retirement funds, pension funds are underfunded by $323 billion at the companies, a sharp drop from an overfunded position of $0.5 billion at the end of 2001, according to the Reuters report.  A year earlier, the funds were overfunded by $215 billion.

Adrian Redlich, director of Merrill Lynch’s global analytic and thematic research, said that S&P 500 firms are still assuming an average long-term return on pension fund assets of 9.3%, when the expected returns are more likely to come in at 8% to 8.5%.  “Indicatively, these changes could lead companies and analysts to downgrade earnings, over the coming six months, by 5 to 10 percent,” Redlich wrote in a research note, according to Reuters.

Merrill’s estimates are based on the assumption that the actual return on plan assets will be a negative 10%, and that company contributions and benefits paid this year are in line with 2001 payouts.

Double Whammy

Earlier in the day, a report on public pension funding from credit ratings agency Standard & Poor’s triggered concerns, coupled with comments on the status of private pension plans in a teleconference discussing the results (see  S&P: Pension Pressures May Push Public Funds). Morgan Stanley analyst  Rebecca Runkle added to the concerns yesterday, citing concerns that, absent a turnaround in the markets, IBM might soon have to ante up another $2 billion to $2.3 billion in pension contributions.  Her report said that Big Blue’s funding status could drop as low as 80% to 75% by the end of next year (see  Analyst Warns of IBM Pension Pounding .  That concern hit the stock prices of GM and Ford, both of which have suffered from similar pension related concerns of late.