The Association of U S West Retirees



Earnings Reports Start Revealing Ugly Pension Costs
By Lynn Cowan, Dow Jones Newswires
The Wall Street Journal
Wednesday, January 28, 2009

There have been warnings for months about the severity of U.S. corporations' pension underfunding, but this week's round of earnings reports showed just how badly retirement plans will weigh on the companies that operate them.

From the furnaces of United States Steel Corp. (X) to the newsroom of publisher New York Times Co. (NYT), the effects of 2008's crushing market on pension assets was laid out in year-end earnings in recent days.

On Tuesday U.S. Steel revealed it sees total costs for pension and other benefit plans for 2009 at $360 million, up nearly 60% from 2008.  New York Times disclosed Wednesday its pension is underfunded to the tune of $625 million, an amount that it will have to begin paying down in 2010 if markets don't magically reverse course and repair the damage this year.

The pair join heavy-equipment maker Caterpillar Inc. (CAT), transportation company Con-Way Inc. (CNW) and cardboard box maker Smurfit-Stone Container Corp. (SSCC) in recent weeks in lifting the curtain on the ugliness that awaits U.S. investors at companies with large pension plans.

The pensions' losses couldn't have come at a worse time for many of these industries.  With the worldwide economic slowdown, their operating businesses are already under pressure;  New York Times' debt was recently downgraded to junk and Smurfit-Stone has filed for Chapter 11 bankruptcy protection.

"The economic factors last year were so significant, and so broad-based, that few sectors that have these plans will be unaffected" by pension grief, said Cynthia Mallett, a vice president in MetLife Inc.'s (MET) corporate benefit funding group.

There's no doubt there will be more ahead as companies lift the curtain on their year-end earnings in the days and weeks ahead.  The combination of declining asset values and higher interest rates' upward nudge to retirement liabilities is unlikely to leave many companies smugly looking at a fully-funded pension.

While some firms, such as Times Co., will have some breathing space before they have to start making up the funds' shortfalls, many others will have to start pumping cash into their retirement plans in 2009.

Studies that estimated the level of pension underfunding last year all pointed to a similar downturn.  Standard & Poor's in late December forecast that S&P 500 company pension funds would be short by $257 billion, easily surpassing the record $219 billion underfunding set in 2002.  Mercer said at the beginning of this month that S&P 1500 companies' pensions suffered losses of an estimated $469 billion over 2008, causing an aggregate surplus of $60 billion at the end of 2007 to be replaced an estimated aggregate deficit of $409 billion at the end of 2008.  The study by Mercer also showed that pension expense is likely to increase from $10 billion in 2008 to an estimated $70 billion in 2009.

Earlier this week, pension consultant Watson Wyatt Worldwide Inc. (WW) calculated that globally, pension balance sheets deteriorated by about 29% in 2008 and fund assets in 11 major markets shrank back to below 2005 levels.

While the various forecasts measure different groups of companies, they all hew to the same directional trend, say pension consultants.  The initial earnings report revelations in recent weeks indicate the predictions are mostly on target -- pension plan underfunding will likely turn out as forecast, no better, no worse, says Alan Glickstein, a senior retirement consultant with Watson Wyatt.

"I don't think there's been any great level of unexpected revelations in the funded status than we had been predicting," said Glickstein.  "So far, things seem very consistent with what we forecast, and very sad."

By Lynn Cowan, Dow Jones Newswires; 301-270-0323;