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Corp Mess Pension Corporate*


December 31, 2003

Corporate Pensions Face Pressure Despite Stock Rally


This year's stock market rally has added more than $100 billion to corporate America's depleted pension funds, but even that has not been enough to offset forces that continue to weaken the funds.

If all of America's 500 largest companies had to make good on their promises to workers and retirees immediately, they would have to plug a $259 billion gap in their pension funds, according to a study by Standard & Poor's which will be published soon. A year ago, even though stock prices were lower, the same companies were considerably closer to meeting their obligations, being only $212 billion short.

That is because their obligations to their workers have spiraled up at an even faster pace than stocks have risen. One obvious reason for this is that as the baby boom generation ages, many more people are starting to claim their money. Another factor is that many pension calculations incorporate several years' worth of data, to smooth out sharp fluctuations, so the market shocks of the last three years are still working their way through the system. Finally, an otherwise positive economic development, low interest rates, is an albatross on the funds because they magnify the value of future pension obligations in today's dollars.

Whatever the reasons, for the nation's corporate pension funds to have lost ground in this year's bull market suggests that the troubles that flared up in the bear market will not be easily cured, and almost certainly not by market gains alone. But after more than a year's search for solutions, officials with responsibility for the $1.6 trillion sector remain sharply divided on what to do.

Some companies have found ways to bring their plans up to full funding, including General Motors, which started the year deep in the hole. But others, like UAL, the parent of United Airlines, remain burdened with woefully underfunded plans and lack the cash to make even the minimum contributions required by law. They are lobbying for changes in the rules.

Most retirees continue to get their pension checks, to be sure. The pension system is not out of money, nor is it expected to run out in the foreseeable future. But over all, companies' pension assets are slipping further behind their obligations, renewing questions about whether enough money will be there for all of the 44 million Americans who have been promised pensions sooner or later.

The nation's pension predicament has major implications for investors. For starters, it is difficult for them to calculate how much cash any given company's pension liability will pull away from the business. About three-fourths of America's 500 largest corporations, as well as tens of thousands of smaller businesses, offer traditional, defined-benefit pensions and are required to set aside money to pay them. While the companies are required to make good on them, these debts are rarely stated clearly on corporate balance sheets.

"The investor has to figure out where the money's going to come from, and how it's going to affect the growth of the company," said Howard Silverblatt, the Standard & Poor's analyst who is compiling the pension study. The Financial Accounting Standards Board will begin requiring more disclosure of pension data starting in 2004, but not enough to satisfy the many critics of pension accounting.

Even if the cash problem were solved overnight, another uncertainty would remain: where exactly should all the pension money be invested? For years, fund managers have collectively parked about two-thirds of their assets in stocks. But with the population aging and more and more pensions coming due, some specialists say a larger share should be shifted to safer investments like bonds. If that happens, the implications for the markets would be huge.

As for solving the current cash crunch, Bush administration officials say recent events show that the current pension law is not enough. In two of the most destructive recent pension failures, Bethlehem Steel and U.S. Airways both followed the funding rules but ended up with huge deficits anyway, costing steelworkers and pilots more than $1 billion in lost benefits when the plans finally defaulted.

Earlier this year, administration officials pushed for an array of amendments to tighten the law. They called for making companies take the looming costs of older workers into account when calculating pension debt, for example; for fuller disclosure of pension information; and for higher pension insurance premiums for companies with high-risk investments.

But none of the administration's ideas has attracted much support in Congress, which must enact any amendments. Business groups and some unions have argued that the pension law is outdated and punitive and needs to be relaxed, not tightened. Unable to agree on a solution, Congress let a temporary relief measure that has reduced pension obligations for the last two years expire today. As a result, companies will suddenly owe substantially larger contributions - about $35 billion more in 2004, according to government projections.

Companies expected to owe big pension contributions in the next two years include the Ford Motor Company; Delta Air Lines; AMR, the parent of American Air Lines; ChevronTexaco; Delphi; DuPont; Hewlett-Packard; Halliburton; and Goodyear Tire and Rubber. For some, like Goodyear, scraping together the cash will be very difficult. For others, like Halliburton, it may be easier because military contractors are often able pass through pension costs to the federal government. The companies have until April 15 to produce the cash. Members of Congress have promised to take up the pension issue when they come back late in January, and say they can enact pension relief retroactively. But companies say the uncertainty is meanwhile making planning difficult. Delphi, for example, has estimated that Congressional action could save it at least $750 million over the next five years.

Some companies are biting the bullet and making big contributions. A few, including General Motors, 3M, Honeywell International, Continental Airlines, Delphi, Maytag, Duke Energy, Boeing and ITT Industries, have even put more than the legal minimum in recent months, reducing or wiping out their deficits.

G.M. raised about $18 billion by issuing bonds and selling its Hughes Electronics subsidiary, partly to reassure investors alarmed by its disclosure earlier this year that its total worldwide pension shortfall had surpassed $25 billion, more than the company's entire market capitalization.

The move is considered a big factor in the nearly 50 percent run-up of G.M.'s stock price since the company began to lay out its plans last June - even though the company still has billions of dollars of debt to repay, to bondholders, rather than retirees.

Other companies are trying to decide whether to follow in G.M.'s footsteps. Delphi recently sold $400 million of trust preferred securities to raise money for its pension fund, and combined that with cash on hand for a $1 billion voluntary cash contribution. It says it will pump in another $600 million in 2004.

Some companies on tight budgets are turning to noncash assets to pump up their pension funds, though these contributions must often be approved by the Labor Department. U.S. Steel recently proposed putting the timber rights to 170,000 acres in Alabama into its funds, for example, and Northwest Airlines put in 13.3 million shares of stock in a subsidiary airline.

Companies get tax deductions and increased profits due to a controversial accounting rule when they contribute their pension funds.

Other remedies are also being pursued. At least half of all companies surveyed by the Fidelity Management Trust Company said they had been considering a radical restructuring of benefits. They are not allowed to retract benefits already earned by their workers, but they can "freeze" their plans in ways that prevent some or all employees from earning additional benefits.

Companies can also close their pension plans to new employees, and gradually shift their work forces into new, less generous plans that exert smaller claims on corporate cash. The CSX Corporation, a railroad, took these steps at the beginning of the year, and Treasury Secretary John W. Snow, CSX's chief executive when the changes were designed, has held them up as a model of fairness.

Other companies, like General Motors, Ford, DaimlerChrysler and Verizon, have given workers a bonus rather than a pay raise this year, a potential brake on pension obligations that are often based on wages or salary. And Verizon says it has extinguished its pension debts to more than 20,000 employees this winter by persuading them to accept lump-sum payments instead.

The General Accounting Office spent several months this year trying to find out how many companies have frozen their pension plans since 2000, but concluded that the task was impossible because companies are not required to divulge the information. (They are required to tell the government when they cancel pension plans entirely, however, though such cancellations are uncommon at the moment.)

Some companies, especially those like airlines that offer very rich benefits to some employees, have reached the point where they can no longer comply with the pension law and are requesting exemption from this year's contributions. The Internal Revenue Service declines to divulge the names of the companies that have sought such waivers, but it says their number has increased sharply this year. A few companies, like Northwest Airlines and United Airlines, have disclosed their applications for the waivers in their filings with the Securities and Exchange Commission.

These financially strapped companies have also been lobbying Congress to reverse a 1987 law that requires them to make quarterly catch-up contributions, which United alone says would cost it $4.8 billion over five years and impede its struggle to emerge from bankruptcy. The House voted overwhelmingly to suspend those payments for the airlines, but the measure has stalled in the Senate, and the Bush administration has expressed firm opposition to such relief.

"Giving a special break to weak companies with the worst-funded plans is a dangerous gamble," said Steven A. Kandarian, executive director of the agency that insures pensions. "The risk is that these plans will terminate down the road even more underfunded than they are today. If that happens, workers will lose promised benefits and the pension insurance system will suffer additional multibillion-dollar losses."

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