Corporate America faces big pension shortfalls

NEW YORK (Reuters) - Collapsing stock prices have created shortfalls in pension plans in dozens of large U.S. companies, which may require them to pump in tens of billions of dollars of cash, hurting earnings.

With corporate America facing pension plan shortfalls totaling several hundred billions of dollars, more companies will in 2009 need to shore up their plans to ensure they can handle commitments to retirees, several analysts said.

And with the recession expected to cause a growing number of companies to go bankrupt, the taxpayer burden could increase if the federally-chartered Pension Benefit Guaranty Corp were to step in to cover more shortfalls. Corporate defined-benefit plans cover nearly 44 million Americans, the PBGC has said.

"We have to teach the private sector not to add leverage and risky assets, and let future workers pay for the needs of current retirees by promising future benefits beyond what companies can deliver," said Laurence Kotlikoff, an economist at Boston University.

Credit Suisse accounting specialist David Zion said on Thursday that 360 companies in the Standard & Poor's 500 may have underfunded pension plans, including 304 whose plan assets may be less than 80 percent of liabilities.

He estimated the total amount underfunded at $362 billion, compared with a more than $58 billion surplus a year ago. The shortfall is nearly twice the $200 billion level in 2002, the last bear market in stocks.

"As you can see, pension plans are much worse off this time around," Zion wrote.

Pension plans of S&P 500 companies ended 2007 invested 61 percent in stocks, 28 percent in fixed income, 4 percent in real estate and 7 percent in other assets, S&P has said.

LOAN COVENANTS AT RISK

The Pension Protection Act of 2006 requires companies with underfunded plans to pay additional premiums, and closed loopholes that had allowed such plans to skip payments.

Some big companies including Boeing Co and Lockheed Martin Corp have already acknowledged big hits to pension plans from recent market turmoil.

Analysts said increased pension liabilities could reduce companies' ability to spend on day-to-day operations. It could also make it harder to preserve their credit ratings and book values, perhaps making it tougher to meet loan covenants.

The consultant Mercer this week estimated $409 billion of pension underfunding at companies that make up the S&P 1500.

Mercer, a unit of Marsh & McLennan Cos, estimated that S&P 1500 companies may have to pump $70 billion into pension plans in 2009, up from $10 billion in 2008.

That $60 billion increase would cut into earnings by 8 percent, based on $727 billion of net income in 2007. Any hit could be even greater in percentage terms if the recession were to cause overall profitability to decline, as is expected.

Mercer estimated that large U.S. companies could cover only 75 percent of their obligations at year end.

In a separate report, a Bank of New York Mellon Corp unit estimated a typical plan's assets-to-liability ratio slid more than 24 percentage points in November and December alone.

"The (Federal Reserve's) drive to bring down interest rates to help the economy has had the collateral effect of increasing the liabilities" of plans, said Peter Austin, executive director of BNY Mellon Pension Services.

OBAMA NOMINEE FAVORS DIVERSIFICATION

In October, Congressional Budget Office chief Peter Orszag told a House committee that "severe stresses in financial markets almost inevitably cause wrenching adjustments by workers and employers."

But Orszag, now President-elect Barack Obama's choice to become White House budget director, said companies can avoid unnecessary risks through diversification, such as by investing in index funds rather than individual stocks.

Many companies have shifted in recent years to uninsured plans such as 401(k)s, where employees direct the investments.

The PBGC ended its fiscal year on September 30 with an $11.2 billion shortfall. It later took on or sought court permission to offer pension protection at investment bank Lehman Brothers Holdings Inc, auto parts supplier Visteon Corp and pulp company Pope & Talbot Inc.

Zion, of Credit Suisse, said 94 companies in the S&P 500 could see pension costs drop in 2009 from accounting mechanisms, though costs for some of these could rise in 2010.

He cautioned, though, that pension costs could create a "headwind" for 274 members of the S&P 500, potentially reducing earnings by more than 10 cents per share at 55 companies.

"Look for more companies to start working this into their 2009 earnings guidance over the next few weeks," he wrote. "Analyst estimates could be revised downward."

(Reporting by Jonathan Stempel; Additional reporting by Emily Chasan; Editing by Tim Dobbyn)