Thanks to sizable pension liabilities of $1.3 trillion and corporate debt of $2.87 billion, total corporate obligations for the S&P 500 companies are estimated to hit $4.17 trillion at year end, or a hefty 37.7% of their combined $11.06 trillion market capitalization and pension assets.
Although that ratio is down from 43.6% in total obligations for 2002, the shortfall in pension assets alone represents a whopping 60.4% of 2003 estimated total corporate earnings of $429.6 billion. In 2002, the shortfall represented 83.5% of the more anemic earnings for companies in the S&P 500 index, Mr. Silverblatt said. In contrast, companies had pension surpluses of 23.3% of their combined market cap and pension assets in 1999.
Consequently, financial statements of companies are more leveraged now because of the weightier pension liabilities, he said.
Moreover, despite the recovery in pension assets this year, they're still below the 2001 levels of $1.08 trillion and well below the all-time high of $1.3 trillion in 1999, Mr. Silverblatt said. "Yes, they have gone up, but they are nowhere near the top," he noted.
At the end of 2002, pension funds for S&P 500 companies were 81% funded, or a shortfall of $220 billion, according to an analysis by Morgan Stanley & Co., New York. By the end of 2003, the deficit is expected to grow to $293 billion, with pension plans funded at a 78% ratio, excluding contributions during the year. Even assuming contributions and a funding level of 81%, the deficit has still grown because the interest rate used to discount liabilities has fallen, said Michael Peskin, principal in the global pensions group and head of asset-liability analysis at Morgan Stanley.
"On the whole, the capital markets have not even come close to bailing out the pension system," he noted.
To compound their problems, because most companies smooth their assets over a five-year period, they are going to have to drop the hefty returns their pension funds earned in 1998 to add in the returns from 2003. Assuming an allocation of 60% domestic stocks, 30% bonds, 5% cash, and 5% to international equities, pension funds earned a return of 15.9% for the 11 months ended Nov. 30, according to Ron Ryan, the president of Ryan Labs, New York. That compares with a 21.34% return in 1998.
"Things got worse, not better, because of smoothing," he said.
But according to the Ryan Labs index, pension liabilities grew 0.45% through Nov. 30, whilet assets grew by 15.59%, so that assets outpaced liabilities by 15.14%.
As if that were not enough, Congress left town earlier this month without passing legislation that would replace the benchmark 30-year Treasury with high-grade corporate bonds for measuring liabilities. This could put some companies in a precarious financial position next year unless lawmakers enact the legislation before companies must make their next contributions to their pension funds in April. However, lawmakers are expected to make any legislation retroactive to year-end 2003, which would allow companies to escape further contributions.
American Airlines, Fort Worth, Texas, is hoping that lawmakers do quickly change the law so that it can avoid making an accelerated contribution to its pension fund next year. "We have a ways to go before becoming fully funded," said William F. Quinn, president of AMR Investment Services, which manages the $5.8 billion in airline defined benefit assets.
The airline is one of the few companies whose pension fund's funding level should improve, and Mr. Quinn said that was because of a new employee contract signed earlier this year that will lower pension liabilities.