There's an element of vicious cycle here. The need to pay more into pension plans will lower corporate earnings which will lower stock prices which will lower pension plan values.
Pension plan losses are about to knock out $70 billion of corporate earnings, according to a report by consulting firm Mercer. Huge investment losses have left the funds of the Standard & Poor's 1500 some $409 billion in the red, the firm estimates in a report released Jan. 7. More than fully funded a year ago, these plans have suffered their most precipitous one-year drop in at least two decades, with the average fund now holding enough assets to cover just 75% of promised retirement payouts.
Downturns cause pension plans to become underfunded which then causes corporations to take even bigger hits to make up for losses.
When pension plans are underfunded, companies are required to plow enough additional money into the funds each year to correct the imbalance, a process than can take several years. This year, Mercer estimates that the companies in its study will end up reporting about $70 billion of pension expenses, up from about $10 billion in 2008. That would equate to an 8 percent reduction in annual profits compared with 2007, the most recent year for which companies have reported full annual results, Mercer said.
Of course, defined benefit pension plans are dwindling in number. A growing portion of the US labor force no longer gets a defined benefit pension plan as part of their benefits.
As reported earlier, a coalition of large companies that still offer defined-benefit plans is seeking a suspension or delay of new rules that would further drain them of much-needed cash. The Pension Protection Act of 2006, passed after funding dropped following the technology and internet collapse in 2001, requires companies to cover 94 percent of retirement-plan liabilities to be considered fully funded in 2009.
Besides paring back risk, more companies will likely consider freezing their defined pension plans, said Adrian Hartshorn, also a member of Mercer's financial strategy group. A frozen pension plan preserves employees' vested benefits but eliminates future accruals. Already, many major companies have taken this step including Motorola Inc. (MOT), BertelsmannAG's Random House Inc. and GenCorp Inc. (GY).
"Some companies will inevitably will take that step," said Hartshorn. "What they need to bear in mind is that even if they freeze it, they will still have legacy assets to deal with."
A long term slowing of economic growth will force more companies to freeze their defined benefits pension plans. My guess is that a combination of demographic problems and Peak Oil will cause the US economy to grow more slowly in the next couple of decades. So I expect pension plan benefits to get cut further.
|Share |||By Randall Parker at 2009 January 07 09:43 PM Economics Entitlements|