Pension Funding Gap Narrowing: Bear Stearns

August 21, 2003 ( - Things may finally be looking up for corporate pension plan funding, according to a new report.

According to Bear Stearns, a rising stock market coupled with stable interest rates have contributed to a narrowing of the pension funding gap among the 100 companies in the Standard & Poor’s 500 with the largest employee benefit obligations.  Among those firms the gap could slim to a projected 13% by year-end 2003, according to Reuters, citing the report.  Not only is that down significantly from the 18% gap at the end of 2002, by the end of 2004, the funding shortfall in  those 100 companies’ pensions should shrink to 6%, the report said.

“With the S&P 500 index up 13% thus far in 2003 and interest rates up 80 basis points off their June lows, market data suggests that the funded status of pension plans may be positioned to rebound,” the report said.

Smoothed Over?

But things could still be a bit sticky over the short term. Pension costs reported on the books will still shoot up this year because current accounting rules tend to spread pension costs over several years – a practice known as “smoothing.” The rules were designed to prevent company earnings from fluctuating wildly because of the the pension fund’s performance, but after several years of rough markets, that buffer is largely used up.  As a result, net pension costs will jump to $11.9 billion this year for those 100 companies from the $3.3 billion booked last year, Bear Stearns said

A pension plan becomes underfunded when the value of its assets drops below the company’s expected obligations to its employees. During the past year pension rules have attracted attention with a maelstrom of pension underfunding problems (See America’s Pension Crisis ).   The current rule governing pension accounting standards, FAS No 87, has come under fire for its “smoothing” language (See Smooth Move ). 

Change Ahead

It looks like changes are afoot in pension reporting rules, however. Accounting rulemaker Financial Accounting Standards Board (FASB), tentatively decided this week that more stringent pension reporting rules requiring the disclosure of more information more often should be adopted by companies by the end of the year (See FASB: New Pension Reporting Rules to Hit by YE 2003 ).

In recent years, corporate pension plans have been hit by a tumbling stock market that has shrunk pension assets while falling interest rates have added to their woes by boosting future pension obligations for companies.   Many companies have been forced to divert cash and stock to prop up underfunded pension plans, while increasing pension costs have begun to bite into earnings, Bear Stearns said.