U.S. corporate pension plans face their biggest funding shortfalls since at least 1999, forcing companies to use profits and cash stockpiles to pay retirees instead of investing in their businesses, according to Credit Suisse Group AG.
Defined benefit pension plans at companies in the Standard & Poor's 500 index are probably 75% funded, below the previous trough of 78% in 2008, leaving a combined $402 billion in shortfalls, analysts David Zion and Amit Varshney estimated. Pension costs might keep rising next year, threatening earnings at 265 companies, including Chicago-based Boeing Co., they said.
“Earnings estimates may have to come down,” the analysts wrote in a note dated Sept. 23. “Unless we see a spike in yields on high-grade bonds or a stock-market rally in the fourth quarter, it looks like the health of most pension plans will deteriorate this year,” and “pension contributions could become more of an ongoing drain on cash which may not be reflected in the market's expectations.”
Corporate pensions have suffered after the S&P 500 posted its first negative total return over any decade and the Federal Reserve cut its benchmark interest rate to a record low in December 2008.
S&P 500 companies' pension funding levels might have dropped $134 billion this year as bets on higher interest rates went awry and the stock market weakened, the analysts said. The benchmark for U.S. equities is up 1.7% this year while the yield on the two-year Treasury note touched a record low. The S&P 500 posted an average decrease of 0.9% a year from 1999 to 2009, including dividends, the first negative return for a decade since data began in 1927, according to S&P analyst Howard Silverblatt.