Although many factors go into the escalating costs, Credit Suisse First Boston (CSFB) Corp. accounting analyst David Zion sees the decline of interest rates as the main culprit behind the deteriorating corporate pension fund health. This is due to the domino effect of falling interest rates leading to declining discount rates, which are used to calculate the present value of future pension benefits owed, according to a Wall Street Journal report.
In the end, pension accounting practices will show a larger pension obligation due to the funded status measure of the current value of future retirement benefits owed to employees against the value of the assets in the plan. The larger the obligation, the less healthy a plan can appear. Therefore, pension obligations will continue to grow as much as 10% this year, outpacing the recovery of plan assets. In fact, the CSFB study, foresees an aggregate decline in the funded status of pension plans by $95 billion this year, based on a 0.79%-point decline in interest rates.
By contrast, CSFB had earlier assumed a quarter-point interest-rate rise in 2003. In that scenario, the firm had predicted a $37-billion improvement.
Further, the avalanche does not stop at the defined benefit door. The higher pension costs then begin to pressure corporate earnings as companies “could be required to make additional contributions to their pension plans,” Zion said in the report.
What might be expected? Zion recalls how many companies this past fall talked about the waning health of pension plans and the impact that would have on earnings, balance sheets and cash flows this year. “As companies get a clearer picture of the health of their pension plan this year, we would not be surprised to hear the same type of discussion when they provide guidance for 2004,” Zion said. Looking at 2002, earlier CSFB data showed $46 billion was poured into the defined benefit plans of the S&P 500 constituents (See Companies Pour $46 Billion Into Pensions in 2002 ).