Less than a year after most major companies found themselves operating with comfortable pension surpluses, many now are staring at the likelihood of ending 2008 with their defined benefit plans well in the red.
The result: Corporations will have to cough up big chunks of cash, seemingly at the worst possible time, to reduce their plans unfunded liabilities.
In some worst-case scenarios, under a provision of the Pension Protection Act of 2006, the losses could trigger automatic freezes of defined benefit plans when funding levels fall below 60%,
Large corporate pension plans have taken an astounding blow so far this month, losing an estimated $100 billion of their combined funded status over the course of just five days. Its a hit that could drive the already deteriorating funding levels of corporate pensions even deeper into deficit, as 2008 has hardly been a kind year to defined benefit plans even prior to this months carnage.
The 1,500 largest U.S. corporations collectively had $1.66 trillion in pension assets at the end of 2007 to cover $1.6 trillion in liabilities, according to data from Mercer LLC.
But these plans have about two-thirds of their assets invested in the equity markets, on average, and by the end of last month their collective surplus had vanished. They were only 97% funded at the end of September, with their total funded status dropping by $100 billion over nine months. (The figure could have been far worse if yields on corporate bonds, which companies use as the basis for calculating their pension liabilities, hadnt spiked in the third quarter.)
That nine-month hit pales in comparison with the most recent losses these plans appear to have sustained, courtesy of one extremely Red October. As equity markets everywhere were slammed over the first five days of the month the Dow Jones Wilshire 5000 index declined more than 15%, its worst five-day return since October 1987 corporate pension funds assets shriveled, while their liabilities remained largely unchanged, said Adrian Hartshorn, a consultant in Mercers financial strategies group in New York.
That combo likely translated into another $100 billion in funding declines at the 1,500 biggest corporate pensions, he added, meaning the group is now only about 90% funded.
Put another way: Large corporate pension plans appear to have lost as much in the first five days of October as they did in all of 2008.
Its staggering, really, said Mr. Hartshorn. And its created a situation in which theres a strong likelihood that corporations pension expenses could be significantly higher next year.