Don't Count on That Company Pension; the Soft Economy Is Taking a Heavy Toll on Defined-Benefit Retirement Plans, with 240 Corporations Reporting That Their Plans Are Underfunded by More Than $300 Billion. (Nation: Retirement Planning)

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Although Federal Reserve Chairman Alan Greenspan claims the economy is a little soft, millions of employees counting on guaranteed retirement benefits, as well as shareholders looking for a substantial return on investments, might argue that it is he who has gone soft and been caught up in the economic bubble he says he couldn't predict.

At the end of last year, two-thirds of the 360 Standard & Poor (S&P) 500 companies that offer defined-benefit retirement plans reported they were underfunded by more than $300 billion. Unless the market does a speedy and significant about-face, pension deficits will continue to increase, causing serious and prolonged damage to corporate profits and cash flow, say analysts.

Corporations that offer defined-benefit retirement plans pour money into them, which then is invested to protect and increase pension assets. This works well when the market and the economy are healthy. When the economy is soft, and bubbles go undetected, the market takes a bath and profits become losses. By law, corporations committed to these programs must fund their pension plans even if it means taking other corporate assets to meet pension obligations. This avenue, of course, leaves investors very cranky, as it cuts into shareholder profits and, worse yet for the company, risks mass capital flight from the corporate stock.

Eric Fry, an investment strategist for New York-based Apogee Research and a columnist for the Daily Reckoning, tells INSIGHT: "The fact that the vested powers that be say everything is fine means absolutely nothing. Is it fine; is it not fine? No one really knows, and all we can say is that it is dangerous." As Fry explains, "A big bull market will make all of the underfunded pension worries moot. But if the market muddles around where it is now, or goes lower, there are a number of issues to worry about."

For example, says Fry, "Take Deere & Co., the farm-equipment maker. During the fiscal year ending Oct. 31, 2001, it expected its pension plan and postretirement benefit plans to produce investment gains of $657 million. In actuality, these plans had losses of $1.42 billion--a difference of more than $2 billion. These latest losses bring Deere's underfunded pension liabilities to more than $3 billion. At some point Deere will have to deposit actual cash into its underfunded pension plan to make up the $3 billion shortfall. That's real money to Deere ... $3 billion represents more than five years' worth of average net income."

As Fry sees it, "Even if the world stands still, it doesn't stand still for these companies because their liabilities are increasing at a double-digit rate every single year. So they not only have to make up the pension shortfall, they also have to make up the 11 percent growth per year in the cost of taking care of their pensioners. Regardless of the market gyrations, these pension obligations are increasing every year."

Assuming that the market continues to deteriorate, and troubled corporations find themselves in bankruptcy, retirees still have some hope of a retirement benefit. After all, there is the Pension Benefit Guaranty Corp. (PBGC), created by Congress in 1974 to protect the retirement benefits of more than 44 million workers and retirees. Some 35,000 insured pension plans participate in the PBGC, paying a flat $19 per employee per year, plus additional variable rates paid by the underfunded plans. Through these premiums and fees, investment income and recovered assets from terminated plans, the PBGC has a premium revenue of $845 million as of 2001 and a surplus cushion of a little more than $4 billion.

Since 1974 nearly 624,000 retirees from nearly 3,000 terminated pension plans have received pension benefits from the PBGC. In 2001 alone, the PBGC paid $1.04 billion to retirees whose pension plans went under with the company. According to Jeffrey Speicher, a spokesman for the PBGC, "We're the insurance behind the defined-benefit programs. …


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