Corporate pension surplus of '07 now a huge deficit

The Baltimore Sun

The collapse of the stock market last year left corporate pension plans at the largest companies underfunded by $409 billion, reversing a $60 billion pension surplus at the end of 2007, according to a study released yesterday.

Shoring up the plans could cause further pain for workers, businesses and the struggling economy at a time when they can least afford it, pension specialists said.

"The chaos that has been observed in the world's financial markets over the last 12 months has had a major adverse impact on pension plan funding and will negatively impact corporate earnings," the Mercer consulting firm said. "Moreover, the trend in recent months has been one of alarming deterioration."

As Mercer and other pension specialists described it, the pension problem illustrates how the recession and the meltdown in the financial markets can become self-reinforcing.

Ballooning pension deficits will leave some companies with diminished profits, weaker credit ratings and higher borrowing costs, which can translate into lower stock prices, said Adrian Hartshorn, a Mercer principal. The need to cover pension shortfalls could prompt businesses to reduce spending on items as varied as dividends and equipment to boost productivity.

Though shoring up pension funds is supposed to increase employees' financial security, it could involve such tradeoffs as reductions in wages, benefits and jobs, said Mark Warshawsky, director of retirement research at Watson Wyatt Worldwide, another consulting firm. It also could prompt companies to freeze the amount of pension benefits employees can accrue, he said.

Traditional pension plans have been largely supplanted by 401(k) plans, which offer no guaranteed payouts. Like pension funds, Americans' 401(k) accounts have generally plummeted over the past year, and some companies have added to the strain by cutting matching contributions.

When companies go bankrupt and are unable to shoulder their pension obligations, the federally chartered Pension Benefit Guaranty Corporation steps in and covers the shortfall, subject to legal limits that would leave many higher-paid workers with smaller pensions than they had been promised.

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