Pension funding levels of S&P 500 companies are expected to weaken by the end of the year, according to a report by Credit Suisse First Boston. Pension plans of companies comprising the index are estimated to be underfunded by a total of $218 billion, an increase from $165 billion at the end of last year, according to the pension accounting research report written by CSFB research analysts David Zion and William Carcache.
The plans' total funding level will drop to an estimated 85% at year's end, compared with 89% at the end of 2004. The plans will have an estimated $1.243 trillion in assets at year's end, with total projected benefit obligations of $1.461 trillion; that compares with $1.268 trillion in assets and $1.433 trillion in PBO payments at the end of 2004. The report estimates that 325 of the S&P companies will have underfunded pension plans at year's end, compared with 319 the year before.
"A flat stock market, combined with a growing pension obligation, does not bode well for the health of defined benefit pension plans," said the report. "If the plans get weaker, the companies that sponsor them could get hit from a number of angles: balance sheets could deteriorate; pension costs could go up, putting pressure on earnings; and most important, companies could have to contribute more to their pension plans, a drain on cash."
The estimates are based on a 2% return assumption on pension assets, based on the plans' average asset allocation. That allocation is 62% equities, 29% bonds; 3% real estate and 6% other.