SEI: Pension Spending Hits International Corporate Financials

June 4, 2003 ( - The impact of unhealthy pension plans on companies in North America and Europe has rippled into capital spending, caused the elimination of traditional retirement plans, and even prompted a shift in business strategy.

While many areas of the corporation are being impacted by pension plans, financial consequences are still the most common and severe.  Nearly seven out of 10 (68%) of companies in the study reported a negative impact on corporate financials because of their pension plans, and 75% are concerned about future financial impact, according to a study by SEI Investments of 151 mid-size companies in the US, UK, Canada and Holland with pension assets valued at an average $180 million.

Further, 26% are concerned that underfunding will put them at a competitive disadvantage.  Because of this, 32% of companies with underfunded plans are changing their business plans because of pension issues.

To combat the perceived shortcoming, 22% of the companies are already cutting back on capital expenditures and an additional 11% expect their spending to be impacted.   “Without the ready access to capital markets enjoyed by bigger corporations, these companies face tougher choices when facing pension funding pressures,” Jim Morris, Senior Vice President, SEI Investments, said in a statement.

Rippling Effect

Concern has become reality for 58% that said their pension plans had lowered their companies’ profitability, with another 9% expecting profitability to be impacted in the future.  Additionally, these companies have signaled other possible financial consequences of pension funding, including:

  • cash flow problems
  • reduced share price
  • reduced dividends.

Surprisingly, these results reflect both overfunded plans (38% of the study), and underfunded plans (62%).  If underfunded plans are looked at separately, the most dramatic difference is in the area of financial results, where 70% say their profitability is lower.

“To avoid underfunding in the future, many overfunded plans make pension contributions beyond the minimum funding levels required by ERISA,” explained Morris.  “This could explain the negative financial impact even for companies with overfunded plans.”

Corporate Actions

Nine out of 10 of the surveyed companies, therefore, are taking one or more corrective actions that include:

  • adjusting their pension plan investment strategy (50%)
  • increasing contributions (44%)
  • considering closing their plans and/or converting traditional defined benefit (DB) plans to defined contribution (DC) plans (27%) 
  • replacing their traditional plan with a different type of DB plan (10%).

Examining United States companies separately, only 22% report they are considering closing their DB plan and/or converting to DC.   However, 15%, higher than the international average, plan to replace their traditional plan with a different type of DB plan.

Regardless of possible actions being considered, companies are still concerned about whether their actions will be effective, with 83% still looking for a way to manage their pension plan funding problems.  Among the outlets for help, 94% of plan sponsors report utilizing an advisor, with 24% using six or more advisors.