Pension Losses Could Whack 2009 Corporate Profits

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By STEVEN GRAY, Time

As President-elect Barack Obama moves to stem the financial crisis, the nation's largest companies are struggling with how to handle the volatile market's toll on their pension plans.

Last year, pension plans of America's 1,500 largest companies lost more than $400 billion, mainly due to the collapse of the equities market in which the bulk of those plans are invested, according to a new report from Mercer, the financial consulting firm. Pension plans are also being hit on other side of the balance sheet, as shrinking yields on Treasury bonds expand the scope of their pension fund liabilities. Taken together, the double dose of bad news means companies will have to pony up as much as $70 billion in pension contributions in 2009, up from $10 billion in 2008 — a development that will surely crimp many companies' earnings. (Find out 10 things to do with your money.)

Companies, historically, have taken a decision to deliberately hold equities in pursuit of superior investment performance, and in some years that's worked. But this year, "it's gone wrong, and spectacularly so," says Adrian Hartshorn, a principal in Mercer's financial strategy group. In 2008, the Standard & Poor's 500 Stock index declined 37%.

The developments will further complicate matters for many companies struggling to survive in what is arguably the bleakest economic and financial crisis since the Depression. The true scope of the market's toll on pension plans will become apparent in the coming weeks, when companies release fourth-quarter and year-end earnings statements. In conference calls to investors and analysts, top corporate executives are likely to explain how they plan to handle the loss. Many will likely sharply reduce, or even eliminate, new benefits packages, cut wages, and resort to more job cuts to recover the loss. It will also likely mean reducing investments in new products, or even borrowing from other parts of the business. "It's very difficult to do all of that," Hartshorn says.

The Worker, Retiree and Employer Recovery Act signed by President Bush last month will help a bit by giving pension plan sponsors more time to get a grip on asset losses. Even so, 2009 will present a costly pension plan repair bill.

Despite all the pension plan woes, employees who have a defined benefits plan aren't as exposed to the market's volatility as people invested primarily in 401K plans, experts say. Even in the event of a corporate bankruptcy employees with defined benefit plans are to some degree protected by the federal government's Pension Benefits Guaranty Corporation.

http://www.time.com/time/business/article/...1871258,00.html