Beware Pension-Plan Shortfall - Barron's

Just in case the severe recession isn't presenting enough of a challenge, Barron's suggests many U.S. corporations are vulnerable to a pension-plan shortfall that could force them to make unforeseen contributions and impose other restrictions.

The stock market route has decimated corporate pension assets over the recent downturn, and Credit Suisse calculates that 128 S&P 500 companies face a potential pension-related hit in 2009 - which could collectively cost the group $200B or more:

Corporate pension funds are at the center of a perfect storm: A global bear market has drained assets from funds just as the Pension Protection Act of 2006 has increased funding requirements, beginning with 2008.

Here's a table that summarizes the funding outlook of 10 companies with some of the index's largest pension plans, along with the estimated cost per share for nine companies whose plans are underfunded.

Some highlights:

• Despite dropping back to a 25% exposure to equities by late September, Northrop Grumman (NOC) could see its pension costs triple to $1.74/share in 2009.
• ExxonMobil's (XOM) plan will be only 63% funded by year-end, yet the expected $11.7B bill will not present an issue for the cash-rich giant.
• Believe it or not, GM's (GM) plan should be 96% funded for 2008, which puts it above the 94% funding threshold, and will save cash-strapped GM from having to kick in another $4B.
• The pension funds of AT&T (T), GE (GE), Verizon (VZ) and J.C. Penney (JCP) are all projected to be overfunded at year-end.
• Industrial companies look poised to take a large hit, with the funds of Ryder (R), Ashland (ASH), Goodyear (GT), Eastman Chemical (EMN) and PPG Industries (PPG) all below 80% funded.

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Of interest:

• David Merkel reviews Roger Lowenstein's While America Aged, "How pension debts ruined GM, Stopped the NYC subways, Bankrupted San Diego, and loom as the next financial crisis."
• Daniel Miller's worried about the tendency of pension plans to 'double down' as their losses mount.
• Seth Berlin notes that pension funds, under pressure to produce higher returns, are turning with greater frequency to hedge funds. With the hedge fund industry now collapsing, some hedge-fund-heavy pension funds could be swept out with the tide.

Comments

[billp37:]

Sandia National Laboratories retirees are bought an annuity from PRU upon retirement.

We are starting to study what happens to our retirement checks if PRU goes bankrupt.

Here looks like the best answer, so far.

9) True or false: Annuities are covered by the Federal Deposit Insurance Corp.
ANSWER: False. They are covered by state guaranty associations. Like the FDIC, the associations impose maximum coverage limits, and limits vary from state to state. Note: Money in the subaccounts of a variable annuity is legally segregated from the insurers' assets; if the insurer fails, the owner gets whatever is in the subaccounts. Most states provide at least $100,000 for the guaranteed portion of an annuity contract, according to the Web site of the National Organization of Life and Health Insurance Guaranty Associations, www.nolhga.com/.

www.prosefights.org/nm...

Cramer's November 13, 2008 cnbc presentation on annuity insurance companies attracted our attention. You can find a link to a video of Cramer's presentation at the above link.

2008 Dec 07 09:52 AM

[hazeleyes:]

spelling:

The stock market route

ROUT - one-sided battle...

ROUTE - the road that one uses to go to grandma's...

2008 Dec 07 11:49 AM

[notsosmart:]

this may sound harsh & out of date but in capitalism i assume the worker should be responsible for their own health care & retirement.social security was at one time called"old age assistance program" if im not mistaken.group insurance started out as a perk along with pension plans. i know as a licensed insurance broker i was in at the begginning.im going to be 78 yrs old.at what point does a perk turn into a requirment?business better be careful what the y offer re vacation,sick time,benefit plans etc as the stuff offered in good years has to be kept on in bad.this mix of socialism & capitalism is not working.pay folks a decent wage & let them handle insurance & retirement.if not this business model might collapse.

2008 Dec 07 12:39 PM

[ebworthen:]

It's a rout.

The stock market rout has decimated pension plans.

A route is a road like Route 66.

Good article. The'll rob the pension funds before they pay into them. Declare bankruptcy and short the people who dedicated 20-30 years to them.

Yet another problem with modern American corporations and government; change the rules instead of live by them.

2008 Dec 07 02:25 PM

[gordon:]

According to Phil Grande, philsgang.com/GetPage....
the Pension Benefit Guarantee needs $75 BILLION bailout right now! According
to Phil(see his archive) Paulson is having the Plunge Team prop the market
to prevent any further pension losses, knowing now isn't the time to ask
Congress for the money, on Friday, Phil said Paulson's buddies at Plunge Protection
were in the market buying bank shares, the easiest was to goose-up the market.
PPT is defending $SPX 800, he said the are desperately trying to rally this
back, using the TARP monies given to Paulson's buddies at the 9 primary dealers' trading desks. Nobody on this blog has raised the question of
how much of TARP is being used to buy index futures, especially in the
pre-market, Phil says even after the last 800 pt drop, Paluson Boyz were in
at 4am buying SPY/DIA futures to open the market 200 pts higher the next day, this after CLOSING AT THE LOWS!
Where is the proof the PPT is NOT using TARP for trading?

2008 Dec 07 03:31 PM

[doubleguns:]

The PPT is (if it exists) not going to be able to make the rest of the world buy US stock. Eventually any scheam like this will fail when the banks used to purchase these assets watches these assets fall in value and the banks leverage begins to suffer again. Same trap different day. The manipulation is simply chaseing more people OUT of the market. With russian roulette eventually you get a loaded cylinder and we know what that means.

2008 Dec 07 04:04 PM

[ebworthen:]

If I could invest the taxes the government takes out of my paycheck I'd do it. As it is I can't afford to and I'll never see the money I'm putting in for Social Security or Medicare.

We've been sold out.

I know many people who had their pension plans robbed. Put money in for year after year only to have the company claim "bankruptcy", give the executives golden parachutes, and liquidate the pension plan.

Our government has done the same thing with all of our taxes.

This won't be able to be sustained; there will be a collapse and revolt.

We've sold ourselves down the river; sad.


On Dec 07 12:39 PM notsosmart wrote:

> this may sound harsh & out of date but in capitalism i assume
> the worker should be responsible for their own health care &
> retirement.social security was at one time called"old age assistance
> program" if im not mistaken.group insurance started out as a perk
> along with pension plans. i know as a licensed insurance broker i
> was in at the begginning.im going to be 78 yrs old.at what point
> does a perk turn into a requirment?business better be careful what
> the y offer re vacation,sick time,benefit plans etc as the stuff
> offered in good years has to be kept on in bad.this mix of socialism
> & capitalism is not working.pay folks a decent wage & let
> them handle insurance & retirement.if not this business model
> might collapse.

2008 Dec 07 08:16 PM

[ebworthen:]

Most of those funds in most states are not liquid; there aren't enough funds to cover the pensions.


On Dec 07 09:52 AM billp37 wrote:

> Sandia National Laboratories retirees are bought an annuity from
> PRU upon retirement.
>
> We are starting to study what happens to our retirement checks if
> PRU goes bankrupt.
>
> Here looks like the best answer, so far.
>
> 9) True or false: Annuities are covered by the Federal Deposit Insurance
> Corp.
> ANSWER: False. They are covered by state guaranty associations. Like
> the FDIC, the associations impose maximum coverage limits, and limits
> vary from state to state. Note: Money in the subaccounts of a variable
> annuity is legally segregated from the insurers' assets; if the insurer
> fails, the owner gets whatever is in the subaccounts. Most states
> provide at least $100,000 for the guaranteed portion of an annuity
> contract, according to the Web site of the National Organization
> of Life and Health Insurance Guaranty Associations, www.nolhga.com//.
>
>
> www.prosefights.org/nm...
>
> Cramer's November 13, 2008 cnbc presentation on annuity insurance
> companies attracted our attention. You can find a link to a video
> of Cramer's presentation at the above link.
>

2008 Dec 07 08:19 PM

[mauijeff:]

The airlines have been a money loser for a long time and they are expert at shifting the "burden" of their pension plans to the Pension Benefit Guaranty Corporation (or PBGC). What makes anyone think the the PBGC will not incur more liabilities as the economy continues it's decline?
There are many reasons the Treasury does not want the stock market to continue it's crash the funding issue of the PBGC is just one. Is anyone else concerned about market manipulation? I mean, exactly how much is anything really worth?

2008 Dec 08 04:18 AM

[axelrod608:]

Thanks for the article Eli. We need to be mindful that this is not a simple mess we're in. It is like the many-headed hydra of classical literature. Pension plans have been hammered. Florida's plan held a lot of Lehman preferred, originally purchased for the hefty dividend. Poof ! There goes the underlying asset AND the earnings. As noted, Annuities could also become a problem. They are sold as the one "guaranteed" way to protect retirement funds, but the guarantees aren't looking as healthy as they once did.

If this mess keeps dropping and stays bad a long time - depression - big nanny government will be the only backstop. And look at THEIR balance sheet.....

2008 Dec 08 10:30 AM

[sumosama:]

Very few people will see a return on their "investment" in social security...hence the name!!! Not sure where anyone got the notion this would be a return of their taxes. It is a socialized system that pays for disabilities as well as retirement income as we know it.



On Dec 07 08:16 PM Eric W. wrote:

> If I could invest the taxes the government takes out of my paycheck
> I'd do it. As it is I can't afford to and I'll never see the money
> I'm putting in for Social Security or Medicare.
>
> We've been sold out.
>
> I know many people who had their pension plans robbed. Put money
> in for year after year only to have the company claim "bankruptcy"...
> give the executives golden parachutes, and liquidate the pension
> plan.
>
> Our government has done the same thing with all of our taxes. <br/>
>
> This won't be able to be sustained; there will be a collapse and
> revolt.
>
> We've sold ourselves down the river; sad.

2008 Dec 08 04:28 PM

[Alex S. Gabor:]

The Penny King figures there is about a trillion dollar shortfall in the pension system with another trillion missing from Social Security...this article should give you a clue as to why:

www.associatedcontent....

2008 Dec 15 07:31 PM

[IssacS:]

Bernie Madoff ripped off a lot of people. It comes as small consolation that Madoff is going to jail for the rest of his life, because he ruined the lives of so many. An entire Connecticut town has filed suit against him, his family, his estate and all of his holdings, and also Fairfield Greenwich Group. The allegations is that after people in the town invested money from their pensions into the fund, and therefore to Madoff, he stole the money. To retirees, pension is their lifeline – they cannot rely on payday loans alone. If things go well and fortune smiles on them, they may be able to recover half their funds. Let us hope they can get enough to not have to rely on payday loans instead of their pensions.

Apr 13 05:55 AM