Beware Pension-Plan Shortfall - Barron's

 |  Includes: ASH, EMN, GE, GM, GT, JCP, NOC, PPG, R, T, VZ, XOM
by: SA Eli Hoffmann

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 (NYSE:NOC) could see its pension costs triple to $1.74/share in 2009.
  • ExxonMobil's (NYSE: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 (NYSE: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 (NYSE:T), GE (NYSE:GE), Verizon (NYSE:VZ) and J.C. Penney (NYSE:JCP) are all projected to be overfunded at year-end.
  • Industrial companies look poised to take a large hit, with the funds of Ryder (NYSE:R), Ashland (NYSE:ASH), Goodyear (NYSE:GT), Eastman Chemical (NYSE:EMN) and PPG Industries (NYSE:PPG) all below 80% funded.


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.