Study: Pensions in Grave Trouble

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Study: Pensions in Grave Trouble

Dow Jones News, May 12, 2003

Large U.S. corporations face severe shortfalls in their pension plans that may be even worse than expected, a new study from HSBC Bank says.

Pension plans were only 84 percent funded for companies in the Standard & Poor's 100 index at the end of fiscal year 2002. This translates into a combined pension shortfall of $93 billion, said the study, which looked at S&P 100 companies that provide defined-benefit pension plans.

These numbers could wipe out much of these companies' profits. In 2002, total profits before extraordinary items were about $150 billion, the study said.

By the end of 2003, funding levels are on track to fall to 83 percent, if the value of pension fund assets holds steady. This translates into a shortfall of $117 billion, the study said.

"This number, however, is based on unrealistic assumptions, and we calculate it could be as low as 60 percent - a shortfall of $340 billion," said the study's author, HSBC strategist Patrik Schowitz.

Schowitz said companies are not using realistic interest rates to calculate their future liabilities or the investment returns on pension assets. He said companies also have not yet recognized past losses, which he estimates at about $246 billion.

Companies are assuming an average long-term return of 8.9 percent on their pension fund assets, according to the study. This is less than the 9.4 percent used in 2001 but is still far too high, Schowitz said.

For liabilities, companies are currently using an average discount rate of 6.7 percent for their pension accounting. Under generally accepted accounting principles, this rate is based on corporate bond yields, Schowitz said. Companies use a different discount rate for U.S. regulatory purposes.

"It is clear that companies have so far failed to adjust downwards their assumptions in line with the dramatic fall in interest rates," Schowitz said. Funding problems for corporate pension plans could have a big impact on profits, particularly if companies adjust their interest rates to more realistic levels.