U.S. Pension Crisis

[HenryTo]

The more immediate effect will be felt by the workers, not the corporations as usual. That is, companies will continue to shun and dismantle DB plans going forward - thus leaving the responsibility of savings for retirement in the hands of individual workers (e.g. IBM just froze their $48 billion DB pension plan). The next effect will be felt by companies with huge pension and retiree healthcare obligations, such as GM, XOM, etc. Note that companies such as MSFT, ORCL, and INTC, etc., do not have DB pension plans. Before you invest in individual stocks, make sure that you do some research on their pension plans and understand how this will affect their balance sheets going forward.
-----------------------------------------------------------------------------
Pension Crisis Could Hit Balance Sheets
Saturday January 7, 5:56 pm ET
By Ellen Simon, AP Business Writer
Accounting Change Could Make Pension Crisis Hit Corporate Balance Sheets Over Next Five Years

NEW YORK (AP) -- The pension system is heading for a crisis, or maybe two.

The first is the most worrisome for workers: Too many pension plans aren't adequately funded or are already in default. The companies in the Standard & Poor's 500 with traditional pension plans need to put aside another $40 billion this year to fully fund the plans, according to S&P.

The second impending crisis is an accounting change that may make pension issues more painful for corporations. Accounting regulations for both pensions and retiree health care costs are poised to change in the next five years, in what could be the largest shift in accounting rules in more than 30 years.

"We believe this project will have a significant impact on evaluations, income and balance sheets, and will become the major issue in financial accounting over the next five years," said Howard Silverblatt, equity market analyst at Standard & Poor's.

The Financial Accounting and Standards Board, the arbiter of the nation's accounting rules, has said it will require companies to add their net pension and retiree-healthcare costs to their balance sheets within the next year. Then, over the next three or more years, the accounting methods for pensions and retiree-healthcare costs will also change.

The first change, which will move pension and retiree-healthcare costs from financial footnotes to balance sheets, could be dramatic, increasing companies' leverage and changing computed returns, book value and shareholder equity ratios. These ratios are closely watched, since many loans and bonds deals cap a company's leverage ratio. And the changes could be eye-popping. The aggregate drop in shareholder equity, for instance, will be 10 percent, Silverblatt wrote in a December report.

What about companies that freeze their pension obligations, as one in 10 pension plans insured by the federal Pension Benefit Guaranty Corp. did in 2003, according to the pension agency, and as International Business Machines Corp. announced it will do Thursday?

Freezing pensions benefits can obviously limit a company's liabilities, but unless the company defaults on its pension obligations, it can't walk away altogether.

"Pensions are legal obligations," Silverblatt said. "There's a guarantee."

If the company's pension plan defaults, the Pension Benefit Guarantee Corp., which guarantees pensions for 44 million people, will pay retirees up to $45,614 a year.

But retiree healthcare-costs are a muddier issue.

Of the companies in the S&P 500, 337 offer some kind of medical benefits for retirees. According to Silverblatt's analysis, only 282 companies provide sufficient information for estimates about their retiree-healthcare plans. Those plans are scarily underfunded: Companies would have to set aside $292 billion to meet current obligations, according to his analysis.

The state of these funds "is extremely unsettling," Silverblatt wrote.

Unlike pensions, retiree health care costs aren't a clear-cut legal obligation, unless they're part of a contract, which is the case at Ford Motor Co. and General Motors Corp., where retiree healthcare-obligations are underfunded by $94 billion.

For employers where retiree health care costs aren't part of a contract, the question is what a company's legal obligation is to fulfill the plan's promises. "If a company tells it's employers, 'You have to cover 99 percent of your premium,' is that a breach?" Silverblatt asked.

No agency will step in and pay a company's retiree-healthcare costs. In the S&P 500, retiree-healthcare plans cover 12 million employees.

The discussions around both pensions and retiree health care costs will be "lively, political and complex," Silverblatt predicted.

Pensions and retiree-healthcare costs "have moved beyond individual companies," he said. "Their importance to the global economy is now self-evident."

[rffrydr]

That's no joke: GM year-end results took alot a wind out of our sales with it's "$27-billion" underfunded liabilities...after "BK"--after being out of the market into bonds in '06 and being over-funded to the tune of 18billion in '08. The notion of an operating pension funding company still applies. They would have completely swamped the Pension Guarantee Fund, "Cadillac plans or no." --All of this on top of the healthcare payoffs.

Of course details must work themselves out: they re-integrated Delphi and took over those obligations and they have to get back in good graces in premium-worker finance europe. These discussions should keep in mind what the rock-bottom amortization rates do to this math at this snapshot in time.

Right now the response is that these are contracts the States have already promised and therefore impossible....impossible to go back on them. I know a retired couple, both CA state workers, $20,000/mo. The best thing from a social point of view is that a large chunk gets recycled through the Indian casinos.
_________________
Today is the Tomorrow you worried about Yesterday!

[HenryTo]

I want to consolidate all the posts regarding U.S. pensions into one thread for easier search purposes, if you all don't mind. We can discuss both U.S. public and private DB pension plans on this thead.

The following article discusses the unfunded statuses and obligations in California's 80 largest city and county plans:

http://www.sacbee.com/2010/04/11/2670020/pension-promises-threaten-california.html#storylink=omni_popular

[HenryTo]

A short press release from S&P on this issue back in July 2005. This confirms efficiency's number:

http://www2.standardandpoors.com/spf/pdf/index/071805_Pension-PR.pdf

[efficiency]

Value Line, on the left side just above mid-page provides pension liability details.

Of the S&P companies that do (or did) offer pensions, roughly two thirds are under-funded (to some degree)