20-5 Pension underfunding

20-5 Pension underfunding - The `Crisis' in Pension Plans...

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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 of borrowing. 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- quired contributions. 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."
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This note was uploaded on 05/03/2010 for the course ACCT 202 taught by Professor Yang during the Spring '10 term at UPenn.

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20-5 Pension underfunding - The `Crisis' in Pension Plans...

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