S&P: Pension Funds Worse Now Than End of 2002

June 20, 2003 (PLANSPONSOR.com) - Despite recent gains in the broader markets, pension costs continue to escalate and further erode already weakened pension fund balances

Driving costs higher this year are plan liabilities through the effect of interest rates on economic assumptions.   Interest rates have again been hit, decreasing 30 basis points year-to-date, bringing with them the benchmark discount rate and thus the decline in the benchmark’s funded status, according to a Standard & Poor’s (S&P) report.

With funding status on the wane and thus higher pension obligations – the present value of the future payments for both current and future retirees – pension spending goes on the rise.   “We estimate that through June 18th, the pension funds in the S&P 500 have made almost $100 billion in the market, while their costs have gone up $113 billion.   The result is that funds are in a slightly worse situation than they were at year-end 2002,” Howard Silverblatt, senior equity index analyst at S&P, said in a statement

Sliver Lining?

However, for the full year, S&P points to a potential for a turnaround.   Assuming the S&P 500 closes 2003 at 1030 and there is a slight rise in the discount rate, the status of aggregate pension funding could improve slightly from an underfunding of $212 billion at the end of 2002, to an estimated $180 billion underfunding at year-end 2003.   The result to the S&P 500 should be a reduced cash contribution to the pension fund, thereby improving corporate cash flow.  

The implications of improved pension funding status have sweeping effects for the broader markets, S&P found.   “We predict that pension earnings for many companies will show a loss for this year due to the accounting methodology that averages in several years; this is the so-called ‘smoothing affect’,” explained Silverblatt.   “S&P Core Earnings, which last year subtracted out these pension gains that were ‘smoothed’, will therefore be adding them back in this year.”

This has reduced thevolatility of S&P Core Earnings – corporate accounting and finance concepts tracked by S&P.   Like a reverse domino effect, this is a direct result of the pension trust, which is, in turn, a direct result of the markets and the pension funds investments.