Pensions may hit new snag

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Pensions may hit new snag

By Rachel Beck

Detroit Free Press, August 11, 2003

First, the stock market slump hit corporate America's pension funds. Next, it could be falling interest rates.

Companies were forced to shift big money from earnings into their pension plans last year after falling share prices knocked value from their assets, leaving the plans underfunded.

Now there are worries about the profit-crimping that could result from declining interest rates, which inflate companies' pension obligations.

"This is the perfect storm for pension funding," said Gerry Katz, senior vice president at the retirement services provider Diversified Investment Advisors. "The recent revival in the stock market is not strong enough to relieve companies from these problems."

The pension issues affect only companies with defined benefit plans, or those that promise future pension payments to their employees. Unaffected are companies' defined contribution plans, such as 401(k)s.

A pension plan is considered underfunded when its obligations exceed its assets by at least 10 percent. That's when companies are required to fill the void by taking money from their earnings and adding it to their pension plans.

During the stock market boom, it wasn't a worry for most companies. Many had pension surpluses, with their assets growing thanks to stunning returns on Wall Street.

But the gains slowly disappeared during the crippling bear market, and last year many companies saw their overfunded pensions become underfunded. A study by Credit Suisse First Boston accounting analyst David Zion found the decline in stock markets shaved $173 billion from pension assets of companies in the Standard & Poor's 500 stock index by the end of 2002.

And now, while the rebound in the stock market has helped stem some of the losses in pension asset values, that has only solved part of the problem.

Interest rates have been tumbling to levels not seen in decades, a result of the Federal Reserve's rate cuts since 2001 to recharge the economy.