Suddenly More Pressing

Over the past year or so, the ones in charge have spent a lot of time putting out fires and muffling explosions.

Policymakers and others have focused on unfreezing money markets, boosting short-term liquidity, delaying immediate recognition of "mark-to-market" and other losses, and trying to bolster confidence to the point where day-to-day conditions might somehow return to normal (whatever that is).

However, all of this finger-in-the-dike lurching about has had an unwelcome consequence. Other, seemingly less urgent issues have been allowed to fester to the point where they are suddenly becoming dangerously pressing concerns.

In "Pension Funding Gap Now a Wide Expanse," Financial Week details one issue that could be a major blindside for those who've been overly focused on near term concerns.

Deficit of S&P 1500 companies at record level, with shortfall pegged at $280 billion; corporate earnings could take hit

Pension funds suffered one of their worst months on record in November, sending the funding of the largest U.S. corporations’ defined-benefit plans to the lowest levels ever.

Combined, the pension funds sponsored by S&P 1500 companies saw their funded status shrink by $130 billion last month, according to a new analysis released by consultants at Mercer Tuesday. That follows the $110 billion loss that these companies’ pension funds posted in October, which was a record drop at the time.

The losses incurred over the past two months, along with the $100 billion in declines registered during the first nine months of the year, bring the combined pension deficit of S&P 1500 companies to an all-time high of $280 billion.

The pension plans of these large companies are now only 80% funded, a sharp decline from the 104% funded status that they boasted at the end of 2007.

This collective deficit can be attributed to more than just last month’s sharp decline in equity markets, Mercer noted. Corporate bond yields—which companies use to determine their pension funds’ stream of liabilities—decreased last month, boosted the plans’ liabilities.

So at the same time pension funds’ assets declined dramatically, their obligations grew larger, creating a “double whammy” for corporate plan sponsors that contributed to the record losses last month.

With the end of the year just weeks away, it’s a significant development—and potentially a major setback—for many large corporations. The drop in asset values means that when companies do their required annual actuarial evaluations, they’re likely to close their books with woefully underfunded pension plans.

Thus, many companies will be required to recognize their pension plan deficits on their balance sheets. And they will likely be forced to make larger cash contributions to their pension funds next year—an outcome that could erode corporate earnings and future profitability.

Comments

[Steve]

Not to mention the LARGEST PENSION (Social Security) has absolutely NO ASSETS to back it. None, Zero, Null, Nada. The excess paid in over the past 70 years is spent---gone. Some book-keeping entries exist saying there is a "surplus", but there is NO MONEY. It will have to be BORROWED when time comes to pay it out. Let see, we are borrowing trillions for bail-outs now, what about when SS comes due?

Of course, most readers of Mike's book and blog understand this, but it something the larger public has no clue about...at least not yet. But they will...