Less than a year after most major companies found themselves operating with comfortable pension surpluses, many are now staring at the likelihood of ending 2008 with their defined-benefit plans well in the red—an outcome that would require corporations to cough up big chunks of cash, seemingly at the worst possible time, to plug holes in their pension funding levels.

In some worst case scenarios, the losses could trigger forced freezes of defined-benefit plans because of new pension laws that were introduced in 2006. 

Large corporate pension plans have taken an astounding blow so far this month, losing an estimated $100 billion off of their combined funded status over the course of just five days. It's a hit that could drive the already deteriorating funding levels of corporate pensions even deeper into deficit, as 2008 has hardly been a kind year to defined-benefit plans even prior to this month's carnage. 

The 1,500 largest U.S. corporations collectively held $1.66 trillion in defined-benefit assets at the end of last year to cover $1.6 trillion in pension liabilities, an ideal balance that allowed the group to boast a surplus of $60 billion and an overfunded status of 104%, according to data from pension consultants at Mercer. 

But these plans have about two-thirds of their assets invested in the equity markets, on average, and by the end of last month their collective surplus had vanished. They were only 97% funded at the end of September, with their total funded status dropping by $100 billion over nine months. (The figure could have been far worse if yields on corporate bonds, which companies use as the basis for calculating their pension liabilities, hadn't spiked in the third quarter.) 

That nine-month hit pales in comparison with the most recent losses these plans appear to have sustained, courtesy of one extremely Red October. As equity markets everywhere were slammed over the first five days of the month—the Dow Jones Wilshire 5000 index declined more than 15%, its worst five-day return since October 1987—corporate pension funds' assets shriveled, while their liabilities remained largely unchanged, said Adrian Hartshorn, a consultant in Mercer's financial strategies group. 

That combo likely translated into another $100 billion in funding declines at the 1,500 biggest corporate pensions, he added, meaning the group is now only 90% funded. 

Put another way: Large corporate pension plans appear to have lost as much in the first five days of October as they did in all of 2008. 

“It's staggering, really,” said Mr. Hartshorn. “And it's created a situation in which there's a strong likelihood that corporations' pension expenses could be significantly higher next year.” 

When companies do their required annual actuarial evaluations at the end of this year, a good number of major corporate names will close their books with underfunded pension plans, said John Ehrhardt, principal and consulting actuary at Milliman. 

Companies have operated with pension deficits before, of course. But new funding rules could force companies to make significantly larger contributions to their underfunded plans than before. 

As part of the Pension Protection Act of 2006, companies with underfunded plans must make more aggressive contributions to get their pensions 100% fully funded (as opposed to targets of 90% under previous laws). The rules also assign a timetable—seven years—in which a company must amortize payments to make up for the shortfall, and it essentially closed loopholes in pension laws that permitted companies with underfunded plans to skip out on making pension contributions. 

“Now, if you have a hole, you are forced to fill it,” said Cecil Hemingway, executive vice president and head of the U.S. retirement practice at Aon Consulting. “Strategically, it's becoming a bigger factor when companies consider their future cash flows.” 

There's an even more dire consequence of the decline in funding status—a provision of the PPA that triggers an automatic freeze of a defined-benefit plan when its funding level falls below 60%. Mr. Hemingway said companies with scarce cash and severely underfunded plans may find it extremely challenging to keep their pensions above this level. 

Some companies are already dipping into their coffers to fund their plans. Mr. Ehrhardt reports a number of large corporations making a “flurry” of contributions to their plans last month to shore up funding levels and avoid falling further behind. Contributions made before Sept. 15, he noted, fell under the old funding rules. 

Mr. Ehrhardt estimates the companies with the 100 largest pension plans will end up making between $90 billion and $100 billion in combined contributions this year. By comparison, these 100 companies contributed $27 billion in 2007, $36 billion in 2006, $45 billion in 2005 and $44 billion in 2004. “I wouldn't be surprised if this turned out to be a record year for contributions,” he added. 

The extent of any damage to pension funds will depend, of course, on the way their assets are invested. Some corporations, such as General Motors, have made major moves in recent years to trim their exposure to equities and insulate portfolios from volatility. GM, with the country's largest corporate pension plan, had only 30% of its $117 billion in assets invested in equities at the end of last year and the remainder in fixed-income and alternative investments. In 2005, almost half of GM's pension assets were invested in the equity markets. 

Other companies, however, appear to be more vulnerable to the recent dramatic swings in stocks. According to Milliman data, 16 of the 100 largest corporate pension plans had more than 70% of their assets invested in equities last year, including the $19 billion plan at Bank of America, the $11.5 billion plan at FedEx and the $10.5 billion plan at Johnson & Johnson. 

Pension experts emphasized that a lot can still happen before year-end to influence pension funding levels for good or bad. And while declines in equity markets have had a major impact on corporate pension assets, it's critical to pay attention to the liability side of the pension equation as well. 

Companies use high-quality corporate bond yields to measure the value of their pension liabilities. When these yields are up—as they were in the third quarter—a plan's calculated liabilities go down. 

But if credit spreads manage to return this year to their levels from several years ago, and equity values don't improve significantly by year's end, then the big corporate pension deficit could widen by another $400 billon, Mr. Hartshorn estimated. Such a scenario would force the funded status of the 1,500 largest corporate pension plans to dip below 80%. 

“That,” he warned, “would be the double whammy.”