The ‘Crisis’ in Pension Plans may not really be a Crisis at all
Source: Wall Street Journal, 26 November 2002
Investors have been flinching at bleak disclosures
about the failing health of pension plans this fall. But
the supposed pension crisis isn't something most
shareholders need to be concerned about.
There certainly have been some scary announce-
ments: International Business Machines Corp. said it
might need to pump $1.5 billion into its pension plan.
Boeing Co., too, said it could take a hit in the fourth
quarter to its shareholder equity of as much as $4
billion. And General Motors Corp.'s announcement
that its U.S. pension plans could be short $23 billion
triggered a debt-rating downgrade.
Sure, pension plans have lost billions of dollars this
year, and a group of chronically deficit-ridden pen-
sion plans -- mostly auto makers, airlines and steel
companies -- are in worse shape than ever, which will
likely sap cash flow and in some cases raise their cost
Still, most large company pension plans aren't even
close to being in peril. "The sky isn't falling," says
Jack Ciesielski, who publishes the Analyst's Account-
ing Observer, and who has been analyzing pension
expenses since the early 1990s.
For one thing, merely being underfunded doesn't
automatically mean that companies must dump
money into their pension plans. "People jump out of
their skin when they hear that a pension plan is X-
billion underfunded," says Jeffrey Applegate, former
U.S. market strategist at Lehman Brothers. "There's
this notion that the company is going to have to write
a check in the next nanosecond." Companies, follow-
ing a web of complex government and accounting
rules, typically have years in which to make the re-
During that time, the underfunding can vanish. Back
in 1993, companies in the Standard & Poor's 500
stock index collectively posted a shortfall in their
pension plans. Then came the bull market and year
after year of strong investment returns, leading to
vast overfunding just two years ago.
Then, the continued market decline shrank the assets
in pension plans, while declining interest rates
boosted the plans' liabilities (lower interest rates in-
crease the plans' liabilities, because if one assumes
the assets have a lower return, more money must be
set aside to meet future obligations). This one-two
punch melted the surplus for companies in the S&P
500 to $4 billion in 2001 from $235 billion in 2000,
according to a July report by Morgan Stanley.
Boeing's surplus, for example, shriveled to $1.1 bil-
lion in 2001 from almost $14 billion in 2000, and the
company expects the plan to end the year with a defi-
cit. "The absolutely dismal performance of the stock
market, combined with interest rates coming down
very significantly, makes the situation a `perfect
storm,'" says Walt Skowronski, Boeing's treasurer.
"But like any storm, it can clear very quickly."