S&P: Pension Pressures May Push Public Funds

September 24, 2002 (PLANSPONSOR.com) - The average actuarial funding level for US public pension funds could drop from overfunded to underfunded during fiscal 2002 compared to 2000 levels, according to Standard & Poor's.

In their report, Public Pension Funds Under Stress, analysts Perry Young and Geoffrey Buswick say governments won’t necessarily be forced to make pension cash infusions right away, although 2002 funding levels could average just 95% compared with 103% in 2000. This despite the analysts’ acknowledgement of “some upward pressure on contribution rates”, driven in part by the weak markets and sub-part investment performance.

In part, the analysts’ statement about governments not necessarily on the hook for a large immediate pension infusion is because public pension funds tend to take a long-term financial view. So “two or three poor years are not enough to change long-term expectations at this point,” Young wrote.

“While the decline of stock prices has caused large drops in the market value of public pension fund investments, it has not yet caused wholesale revisions of asset allocation strategies or investment return assumptions,” Young and Buswick wrote in their report.

But, if the underperforming market persists for too long, the S&P analysts admit that corporations may have to pony up pension money after all.
The analysts also cautioned that, recent sub-par investment performance “does not bode well for pension obligation bonds.”

Corporate Count

Standard & Poors also noted that the average funding ratio of corporate defined benefit plans stood at 94% at the beginning of July, compared with a 100% funding level at the end of 2001 – and noted that the funding level could have declined another 4-5 percentage points since then. 

However, S&P noted that a handful of companies account for a large portion of the total pension underfunding.  The ten companies with the highest underfunded obligations according to S&P are:

  • General Motors
  • Exxon Mobil
  • UAL
  • Ford
  • Delphi
  • Delta Air Lines
  • United Technologies
  • Northwest Airlines
  • AMR
  • Pfizer

Those firms accounted for $37.5 billion out of a total funding shortfall of $65.4 billion, according to Dow Jones, citing S&P’s survey.

separate report released this summer by Wilshire Associates  painted a much gloomier picture of public pension funds financial status.  That report concluded, among other things, that half of US pension funds were underfunded in 2001 – up 31% from 2000 levels.