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Underfunded Pension Plans Eat Away at Earnings

October 27, 2008
Related Topics: Finance/Taxes, Retirement/Pensions, Latest News

It’s beginning to look as if large companies may end the year with their pension plans more underfunded than ever—and a handful of corporations are already acknowledging that these deficits are likely to have a significant impact on earnings.

Combined, the defined-benefit plans of companies in the S&P 500 are now underfunded in excess of $200 billion, according to an estimate by Standard & Poor’s senior analyst Howard Silverblatt.

Even if equity markets remain flat for the remainder of the year, these plans will likely end up being more severely underfunded than they were in 2002, when their combined pension deficit was a record $219 billion.

This will require companies to infuse cash into their plans both this year and next to shore up funding levels, Silverblatt said, a factor that would increase their pension expenses and drag down future earnings.

Indeed, several companies—including Lockheed Martin, Boeing and United Technologies—recently noted on earnings calls that their massive pension funds have taken a substantial hit in recent weeks as the equity markets have tumbled. (More than 60 percent of large corporations’ pension assets are invested in equities, according to S&P data.)

Lockheed Martin executives, for instance, acknowledged this month that the assets in the company’s $27 billion plan had declined by roughly 25 percent since the beginning of September. If the plan is underfunded at the end of the year, the company will have to make contributions that could translate into a $60 million expense—a move executives said could trim 30 cents a share off its future earnings.

Finance executives at other large companies, such as Boeing and United Technologies, also noted during their third-quarter calls that their pension plans’ assets have declined by more than 20 percent because of the recent plunge in global equity markets. At Boeing, CFO James Bell said he’s now expecting the company’s pension expenses to rise by roughly $100 million next year, even though its $50 billion pension was overfunded at the end of the third quarter.

At United Technologies, CFO Gregory Hayes noted on the earnings call that pension expense is “obviously going to be a headwind,” but he did not specifically say how much its pension costs might increase. He said that through the end of September, the assets in the company’s $23 billion plan declined by 22 percent, a stark contrast to the 8.5 percent return it expected for the year.

As a rule of thumb, Hayes noted, “for every 1-percentage-point miss, it costs us about $6 million in additional pension expense.” Given the year-to-date return and the company’s 8.5 percent assumption, this 30-percentage-point miss would translate into $180 million in pension expense.

Filed by Mark Bruno of Financial Week, a sister publication of Workforce Management. To comment, e-mail

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