Companies
face gaps in pensions
The $216 Billion Shortfall
By Mark Schwanhausser
Mercury News, May 7, 2003
After
watching a decade of pension surpluses vanish in three years, the nation's
biggest companies are struggling to fill a gaping hole in their pension
plans. The hole is $216 billion deep -- a shortfall of $13,600 per covered
worker.
This
marks the first time since 1993 that companies that comprise the Standard
& Poor's 500 index have too little stashed away to meet their pension
obligations to current and future retirees.
The
problem is even cropping up at some technology companies, which typically
don't provide pensions. In Silicon Valley, Hewlett-Packard's shortfall
tripled to nearly $2.7 billion after it acquired Compaq Computer. And the
pension investments at Agilent Technologies and HP swallowed some of the
worst losses in the nation. Similarly, tech giants such as IBM, SBC
Communications and Verizon Communications each suffered unexpected losses
exceeding $5 billion.
Most
older workers and retirees don't need to worry that they won't get their
pensions, however, because their companies have enough money and time to
plug the gap. The main exceptions are some higher-paid workers at companies
bordering on bankruptcy, such as airlines, who could lose some of their
pensions.
Nevertheless,
underfunded pensions weaken a company's finances and drain cash that a firm
could use to grow, or develop the next big thing.
Because
the pension hole is so deep, experts warn that the problems will persist
even if the stock market ekes out gains.
``Just
stopping the bleeding of having the market go down is not good enough to do
away with this problem,'' said Brett Trueman, an accounting professor with
the University of California-Berkeley's Haas School of Business.
No national crisis
Although
the problem is dire at a handful of troubled companies, experts say it isn't
a national crisis. But they warn that pensions are being pounded in two
ways. Low interest rates are forcing companies to set aside more for their
workers' retirements at the same time the stock market has gouged away at
what corporations have saved.
Congress
is weighing a broad pension bill that would change the formulas that
determine a company's pension obligations. Last week, employer groups
lobbied for funding rules that would allow companies to contribute less and
make pensions appear better-funded.
Among
those dissenting was the quasi-public Pension Benefit Guaranty Corp., which
steps in when companies can't pay their pensions. ``This proposal would
allow plan funding to fall below the already low levels permitted under
current law,'' it said.
The
PBGC isn't alone in worrying. Credit-rating firms such as Standard &
Poor's have also raised concerns over how pension obligations could impair a
company's ability to pay its debts. In mid-April, S&P put 13 companies
-- including Pacific Bell parent SBC Communications -- on ``credit watch.''
S&P also cited about a dozen others where pension obligations are
troublesome.
Worries rampant
A
recent Credit Suisse First Boston report based on 2002 financial filings
underscores why pension worries are rampant:
• S&P 500 companies suffered a nearly half-trillion-dollar swing
in just three years. The $246 billion surplus in 1999 had all but evaporated
by 2001, then turned into a $216 billion deficit in 2002.
• Of the 361 companies in the S&P 500 that offer pensions, nearly
nine out of every 10 were burdened with underfunded pensions -- compared
with just one in four companies in 1999. Of the companies based in Silicon
Valley, the biggest shortfalls belong to HP ($2.7 billion), its spinoff
Agilent ($654 million), and newspaper publisher Knight Ridder ($245
million).
In
percentage terms, Silicon Valley's biggest company -- computer maker HP --
missed the mark by more than most in the nation. That rippled over to
Agilent, which had left HP in charge of its pension investments after
spinning off from HP. Though Agilent and HP expected their pension assets to
grow 7.4 percent, their portfolios actually dropped 23.5 percent and 18.8
percent, respectively.
HP
declined to detail how much of its pensions it devoted to higher-risk
equities, saying only that its investments were staggered because ``the
market had a dramatic decline,'' said spokeswoman Rebeca Robboy. Agilent
reported in financial filings that 80 percent of its U.S. pensions are
invested in equities, while its international pensions devoted about 70
percent to equities.
But
one of the bigger questions is how companies will plug their pension gaps.
Last year, many S&P 500 companies voluntarily shoveled $46 billion in
money or stock into their pensions. Among the biggest contributions came
from GM ($5.2 billion), IBM ($4.2 billion) and HP ($702 million), CSFB says.
HP's growing obligation
In
HP's case, that was largely related to acquiring Compaq and extending the
pension to its workers. That deal doubled HP's pension obligation to almost
$7.8 billion -- and left its pension underfunded by nearly $2.7 billion.
That's more than triple the $846 million deficit in 2001.
The
company downplayed concerns, however, noting that it had $13.2 billion in
cash available in March.
Similarly,
the valley's 15th-biggest company, Knight Ridder, which publishes the
Mercury News, pumped in $138 million of cash -- but its pension fund
remained underfunded by $245 million. That contribution equaled 32 percent
of the company's operating cash flow, which it could have used to pay
dividends or invest in equipment.
KR's
chief financial officer, Gary R. Effren, noted that contributing to pensions
has its pluses. KR not only pocketed tax deductions, but it also might not
be obligated to stoke its pensions again until ``possibly 2005.''
``Knight Ridder is fortunate that we generate
a lot of cash,'' Effren said, adding later, ``The problem is at the
companies that don't have the liquidity or the capacity to borrow money.''
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2002 Global Action on Aging
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