S&P Wants Early Picture of Pension Problems

July 30, 2002 (PLANSPONSOR.com) -The confluence of rising pension obligations and slumping returns is drawing fresh scrutiny on many fronts.

Rather than run the risk of a last-minute surprise, rating agency Standard & Poor’s has asked companies with defined benefit pension plans to submit data on both the performance and allocations of those programs as of June 30, according to Dow Jones.

S&P routinely receives that information as part of its review of company financials, however those details are usually not provided/requested until year-end.  However, reports of a growing disconnect between the accrued pension liabilities and the pension funds in trust to fulfill those obligations have investors nervous.

Earnings Impacts

Those pension obligations have not always been a drag on corporate earnings, quite the contrary.  A Milliman USA study of 2001 earnings reports of 50 large US companies found that they included $54.4 billion of profits from pension funds, without which these companies would have posted a collective loss of $35.8 billion.

Still, after years where soaring markets provided a funding cushion for pension plans, S&P now worries that corporations may be forced to dig deep to cover funding shortfalls from the bottom line, and with good reason.  Even before the sustained market downturn of 2002, nearly two-thirds of the nearly 400 fund officials responding to PLAN SPONSOR’s 2002 Defined Benefit Survey told us that they planned to make contributions to their defined benefit plans within the next 12 months (see Half Empty Half Full ). 

And it’s not just large programs, either.  Among plans with less than $10 million in assets, three-quarters mean to pour in money this year, up from the 69% who planned to make funding contributions last year, according to the survey.

Future Tense

Not that there is necessarily a reason to panic, according to industry professionals.  While recent reports from the Pension Benefit Guaranty Corp. (PBGC) indicate that unfunded pension liabilities for private companies rose to a record $111 billion at the end of 2001 from $26 billion in 2000, these are long-term obligations.  Furthermore, that shift is not just a function of declining stock markets, some is also attributable to the PBGC’s use of the 30-year Treasury rate to determine pension fund returns, according to industry experts.

More recently, the decision of several large pension funds to increase their assumed rate of growth in pension assets has come under criticism (see The Great Oz Exposed ).