Pension fund liabilities "are becoming so huge they may impede the ability of American business to function effectively," according to Christopher McNickle, managing director of Greenwich Associates, in the firm's study about corporate pension costs.
"That may require a rethinking of important, fundamental aspects of the U.S. retirement system," he continued.
"The problem is not merely cyclical - caused by three successive years of market decline and unusually low interest rates," the study noted.
Defined benefit plans have grown "larger than the companies they serve," the study pointed out. Applied to huge pension liabilities, fluctuations caused by normal market volatility are "simply much larger than even a healthy corporation can easily pass through an annual income statement. Funding strategies and accounting practices that worked well when the pension plans were proportionate in size to the corporations sponsoring them are not working any longer."
"In many cases the pension fund has become so large that modest fluctuations in investment markets will overwhelm outlays (pension contributions) based on current payroll.
"Also, such contributions would not clear up the huge unfunded liabilities of corporate funds."
Headed for bankruptcy?
The study concluded that, barring another spectacular and sustained market uptick, "the pension obligations of a significant number of U.S. corporations may force them to follow the steel companies and airlines" into bankruptcy.
And just "tinkering with tactical tools (to boost returns) is not going to solve the problem of this magnitude," the study said, referring in part to pension funds' growing allocations to alternative investments.
A "very large number of companies are depending on alternative investments to improve their chances of reaching optimistic assumptions. But the total percentage of corporate pension fund assets in these categories is a mere 4.6%, too small to make a major difference.
"Obviously, fiduciaries cannot react to this (pension funding crisis) by making still larger bets on riskier investments," the study warned.
That warning followed the information that "the assets of U.S. corporate pension plans have plunged more than half a trillion dollars" in the last two years.
In 2002, 56% of corporations made contributions to their pension plans, up from 44% in 2001 and 37% in 2000. "Many companies, however, can only with difficulty afford to make such payments," the study said.
For 90% of large U.S. corporations that still have defined benefit plans, the study suggested three actions in the face of the crisis:
* Convert to cash balance plans;
* Place more emphasis on defined contribution plans; and
* Increase contributions to defined benefit plans, if they can be sustained.
The shift to cash balance plans "could become an avalanche" if proposed Treasury Department rules on cash balance plans reduce obstacles to conversions such as age-discrimination lawsuits, Mr. McNickle wrote. Cash balance conversions could save corporations a lot of money, the study says.
Corporations will have difficulty with their increasing reliance on defined contribution plans, the study says. The fall in the stock market over the last three years has diminished the luster of the plans, Devereaux Clifford, managing director, noted in the study. The situation could be improved, however, with better education and advice.
The study suggests solutions for improving retirement security.
For defined benefit plans, "all companies (should) commence or reinstate a program of regular contributions ... until a longer-term solution (to the funding problem) is adopted," Rodger F. Smith, managing director, said in the study.
For defined contribution plans, companies should gradually institute a 10% cap on participant allocations to sponsoring company stock and offer investment advice.