Pension Underfunding at Historic High

December 30, 2003

New research from S&P shows pension underfunding in the S&P 500 grew to a record $259 billion in 2003 despite up market.
New York - December 30, 2003.   Standard & Poor's released research from its Investment Services division showing that pension funding continued to deteriorate through 2003 despite a strong stock market. Although the market was up this year for the first time since 1999, pension underfunding in the S&P 500 grew to a record $259 billion from $212 billion in 2002.

Even though the S&P 500 total return for 2003 will likely be in excess of 25% for the year, and pension funds have boosted their assets by $112 billion to $1,063 billion from $951 billion at year-end 2002, they still fall below the 2001 year-end value of $1,089 billion.  Pension obligations however have soared to a year-end projection of  $1,323 billion, up $160 billion from the 2002 close of $1,163 billion.  The result is a deepening of pension under-funding to the $259 billion level from $212 billion a year earlier.

Funding status to market value remained nearly unchanged at -2.58% from -2.62% in 2002.  By contrast, in 1999 S&P 500 funds were over-funded, with the surplus representing 2.30% of total market value.  2003 under-funding represents 60% of 2003 GAAP earnings-per-share. 

"Despite the short-fall, companies on aggregate have sufficient proceeds, both on hand and via the capital markets, to meet current pension obligations, but the current situation is an investor concern," said Howard Silverblatt, equity market analyst, Standard & Poor's. 

"Investors need to assess the full obligations of a company, where the required funds will come from and how any shift in expenditures will affect future growth," Silverblatt added.   'This year many companies will post a pension loss due to the accounting smoothing effect, when they actually had a gain. This will muddy the actual pension situation."

Starting with this year's annual reports, investors will get some additional information from a new Financial Accounting Standards Board (FASB) rule that requires companies to disclose asset allocations, investment strategies, and contributions.  Starting next June, companies will also have to report future benefit payments. 

"Investors need to familiarize themselves with these values and tables, and understand what these figures mean for company growth," Silverblatt said.

While noting that Congress adjourned this year without passing any pension legislation, Silverblatt said, 'Looking forward to 2004, with predicted total returns of 12% for the S&P 500, and current interest levels expected to head slightly upward, 2004 funding should improve, but pensions will continue to remain under-funded for next year.'

S&P 500 HISTORICAL SUMMARY PENSION DATA - Values in $ Billions unless otherwise noted

Year-end

Pension Assets

Projected Benefit Obligations

Pension Fund Status

S&P 500 Market Value

S&P 500 GAAP Income

Pension Status % of GAAP Income

Pension Obligations % of S&P Market Value

Fund Status % of S&P 500 Market Value

2003 Est.

1063

1323

-259

10042

430

-60.38%

13.17%

-2.58%

2002

951

1163

-212

8107

254

-83.50%

14.35%

-2.62%

2001

1089

1090

-1

10463

225

-0.54%

10.42%

-0.01%

2000

1239

1015

224

11715

444

50.38%

8.67%

1.91%

1999

1278

995

283

12315

404

70.15%

8.08%

2.30%

Source: STANDARD & POOR'S QUANTITATIVE SERVICES

 Congress will again address the issue when it returns in January. Pending pension calculation changes would adjust the funding levels as well as the discount methodology, but would not affect benefits.  

 

 

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