Is There a Pension Funding Crisis Now?
You may be
surprised to know that there are differences of opinion about whether we really
are in a defined benefit pension plan crisis now. Janice M. Gregory, vice
president of the ERISA
Industry Committee, a group that lobbies for large corporations on pensions and
other issues regarding employee benefits, is quoted in The New York Times as saying, "There
is no crisis whatsoever."
She attributes the current situation to the fact that interest rates are so low
right now. Her group and many other large companies are taking the position
that the problem will correct itself when interest rates rise.
Although other
analysts and commentators are not as sanguine as Ms. Gregory, there is
agreement on the significance of two factors that are at the root of the
present problem -- the so-called "perfect
storm".
The first factor
is a 40-year low interest rate that, when used in the formula to calculate a
company's pension
liabilities, ratchets up liabilities and requires the company to contribute
significantly more to the plan.
This interest
rate has an inverse relationship to pension liabilities the lower the rate used, the higher the
present value of future pension liabilities will be. Falling interest rates
make future pension liabilities look bigger on company balance sheets.
When this
happens, to stay in compliance with ERISA, companies are forced to set aside
more money to contribute to their pension plans. IBM put almost $4 billion into its pension
plans in December 2002, and although its contribution is among the largest,
other large companies have had to contribute hundreds of millions of dollars in
the past few months.
 The second
factor of the "perfect
storm" is a
precipitously declining stock market that has ravaged pension fund asset
values.
These factors
are threatening all but the most over-funded defined benefit pension plans--not just those in the
airline industry.
According to a
recent Merrill Lynch study, the average pension of a Standard & Poor's 500 company could be
underfunded by about $323 million at the end of 2002, a dramatic change from
being over-funded by about $500 million at the end of 2001.
Page 4 The Uncertain Future of Defined Benefit Plans ð
ERISA
stands for Employee Retirement Income Security Act of 1974, as amended. ERISA
is the law of employee benefit plans and is the source of the funding and
contribution rules that are at the center of the current defined benefit
pension plan situation.
Mary
Williams Walsh, $8 Billion Surplus
Withers at Agency Insuring Pensions, New York Times, January 25, 2003.
Charles
Ruffel and Nevin Adams, The Perfect Storm
-- America's
Pension Funding Crisis, PlanSponsor.com, 11.02, p. 92-96.
Honeywell
International reported in November that it might have to contribute as much as
$900 million more to its pension plans; likewise, Johnson & Johnson ($750
million), 3M ($789 million), and Ford ($500 million, with another $500 million
possible depending on tax considerations). Mary Williams Walsh, Companies Fight Shortfalls in Pension Funds,
New York Times, January 13, 2003.
Ruffel
and Adams, Op.Cit., p. 96
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