November 17, 2008 | last updated May 26, 2012 6:13 am

Pension Plans Pummeled

Richard Sych, senior vice president, Hooker and Holcombe

Defined benefit pension plans offered by Connecticut employers stand to lose 20 to 40 percent of their value in the stock market this year, pushing plans into the red or making existing plan deficits dramatically worse.

And unless Congress steps in to reverse a strict pension funding law it passed two years ago, many companies will be forced to set aside hundreds of millions of dollars to make up for the 2008 shortfalls.

That could disrupt company cash flows, jeopardize credit ratings, delay short-term projects, erode earnings and force layoffs, according to financial analysts.

"Companies will have a lot more pain," said Richard Sych, senior vice president of Hooker & Holcombe, an employee benefits consulting firm in West Hartford.

"Employers will now have to start putting in more money to make up for the losses," Sych said.

Defined benefit pension plans are retirement accounts offered by large corporations that guarantee employees an annuity-type payment after retirement.

Such employer-funded plans typically are heavily invested in the equities market to keep up with the demand of future obligations.

But in the current market downturn — the S&P 500 has declined 38 percent so far this year — company pensions are taking a severe beating.

Plans held by the 1,500 largest U.S. companies have lost nearly $100 billion in value so far this year, leaving them at a 97 percent funding level, or a $35 billion deficit, according to data provided by Mercer, a New York-based consulting firm.

That carnage comes only one year after the largest corporate pension plans had a comfortable $60 billion surplus.

The total funded status for benefit providers could fall to as low as 77 percent by the end of the year, which would represent a deficit of more than $400 billion.

Virtually all Connecticut companies that offer such plans will feel the pain, including United Technologies Corp., Xerox Corp., The Travelers Co. Inc., The Phoenix Cos. and Cigna Corp.

"The reality is everyone is affected," Sych said. "A lot of our clients are going back and redoing their budget numbers. They are all planning and adjusting."

Entering 2008, UTC, the state's largest private employer, had a pension plan with assets of $22.7 billion against projected benefits of $21.9 billion. But that 103 percent funding ratio hasn't survived the stock market's plunge because 58 percent of the pension plan's portfolio was invested in the equities market, according to data provided by J.P. Morgan.

So UTC's pension plan has declined 25 percent, leaving it underfunded by as much as $200 million to $350 million, analysts at J.P Morgan said in an Oct. 20 research note.

Underfunding Grows

"Pension performance has been, as you would expect, pretty tough this year," UTC Chief Financial Officer Greg Hayes said at Goldman Sachs' Global Industrials Conference in New York Nov. 5.

Meanwhile Xerox, Travelers, Phoenix and Cigna each entered 2008 with underfunded pension plans. Their deficits were $653 million, $48 million, $166 million and $628 million, respectively. Each company also has had more than half its pension fund portfolio invested in equities, J.P. Morgan reported.

"Companies are going to feel it pretty bad," said Jon Barry, a principal with Mercer. "If you were 80 percent funded coming into the year and you were heavily invested in equities, you are not in a good position. It's going to very tough."

The Pension Protection Act, a reform bill signed into law in 2006, forces employers to fully fund their pension plans over a seven-year period, starting in 2008.

The law came in response to the termination of several large benefit plans, failures that put tremendous strain on the Pension Benefit Guaranty Corp., which insures employees in private-sector defined benefit pension plans up to $51,750.

The PPA requires companies with underfunded plans to make much more aggressive cash contributions than required before 2006, when they only had to fund 90 percent of their plans and had as long as 30 years to do it.

To be fully funded, a pension fund's assets must equal its liabilities. Liabilities are the present value of the accrued benefits of every individual in the plan as of a certain evaluation date. The assets are how much money the company has set aside to pay for those benefits.

"The law will require pretty significant increases in funding for most companies," Barry added.

As companies begin to make up for the shortfalls, they will have to take money out of their capital budgets, which could deter growth and delay certain projects, said John Ehrhardt, principal and consulting actuary with Milliman, a financial consulting firm with operations in Windsor.

Cash Poor

Companies that don't have the cash might have to borrow it, which could be a challenge if credit markets remain tight. "This couldn't come at a worse possible time," Barry said. "Companies are already struggling with revenue and this just adds to the burden."

UTC, Cigna, MetLife and Xerox have already signed a letter urging Congress to suspend portions of the rule, and lobbyists are pressing for relief.

Many within the industry, including Ehrhardt, believe Congress will accommodate them because it's not in the government's interest to push companies into bankruptcy, dumping more obligations on the Pension Benefit Guaranty Corp.

If Congress doesn't act and companies are unable to meet the obligation, employees will suffer the consequences. Under the PPA guidelines, a company must restrict lump sum payments to employees if a plan falls below an 80 percent funding level.

If a plan falls below 60 percent, it is frozen. That means plans cannot payout any lump sums and benefit accruals are suspended.

Employees that join the company after that would not be eligible for the pension program.

Some companies will likely fall below that level this year, experts agreed.

There is one bit of good news for defined benefit providers.

The PPA allows companies to discount future pension liabilities by a rate equal to the yield on corporate bonds.

Those yields rose significantly in the third quarter, reducing pension liabilities for most companies.

The discount rate has increased to 7.5 percent from 6.2 percent a year ago, Hayes of UTC said. "That has taken away a good portion of [UTC's] pension headwind," he said.


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