S&P Warns of Severe Pension Shortfalls

October 22, 2008 (PLANSPONSOR.com) - Company pensions that went into 2008 in good shape may go into 2009 with what could be their largest underfunding ever from recent steep market losses, S&P warned on Wednesday.

Reuters reported that in a research note, S&Psenior index analyst Howard Silverblatt said funds could suffer an underfunding greater than the $219 billion shortfall seen six years ago.

That is a big difference from last year when S&P 500 companies had $63 billion in overfunding in their pension funds , a level not seen since 1995, and going into 2008 were estimating an 8% return on pension assets for the year.

According to Reuters, S&P said the companies had 61% percent of their money in equities at the beginning of 2008, but since then, the U.S. market has fallen over a third, while some emerging markets are down over a half, Silverblatt wrote.

“While someone might be doing 8%, the reality is that any pension fund manager that is even breaking even this year is most likely demanding a bonus,” Silverblatt said, according to Reuters.”When you calculate it all out at the current market returns, or even assuming a nice fourth-quarter rebound, you get a number that is worse than the $219 billion in under-funding reported in 2002, and that’s starting from the positive 2007 $63 billion position.”

The deficit will have to be dealt with through large, unplanned cash infusions, which will be difficult given tight liquidity in the market, Silverblatt wrote, Reuters said.

Silverblatt also noted that since 2002, accounting requirements have changed so that companies now have to include their funding status on their balance sheet.